Unknown Utility Bill Returns to Zap Credit

Dear Debt Adviser,

My wife and I are getting ready to buy our first home. We have been meticulous about our credit score. My score hovered anywhere from 790 to 810 and my wife's was similar. Last week, I checked and my score had dropped to 690. Stunned, I looked on my credit report. There was a negative action that said I missed a payment to a utility company in 2006. The dates corresponded to when my wife and I moved from one city to another. The current amount is for around $150 and is in collections. Can we dispute the collection, stating that we were never notified about this charge? Should we just pay and hope that my credit (my wife's wasn't affected) goes back up enough to get a decent interest rate? Should I hire a lawyer to fight this?

-Robert

Dear Robert,

Your credit score free-falling 100 points for one collection account seems extreme. However, when a person has a high FICO score, any point drop is going to be larger for the same negative item than for a person with a midrange score. For example, a 30-day late mortgage payment could mean a drop of 90 to 110 points for someone with a credit score of 780, but only a 60- to 80-point drop for someone with a score of 680. Why? Because their credit score already reflects a higher risk factor.

Having said that, please relax. All is not lost, and you won't need to give up your hopes of buying your first home at a decent interest rate. For a 30-year fixed-rate mortgage with a FICO credit score of 790 versus 690, the difference is only about 0.4%, or 4.55% versus 4.15%. Not to mention that, if you explain beforehand why your score took a tumble, I suspect the lender won't penalize you and your wife.

A mortgage lender will most likely review your credit report and not just your credit score. By viewing your credit report, the lender will see you have managed your credit well for an extended period of time. The report will show the collection account is for a small amount, and you have a ready explanation for why it wasn't paid on time. If the debt is legitimate, you need to pay it before applying for a mortgage.

Now, here's my advice for dealing with the collections matter. If you believe the debt is valid and owed by you, then by all means contact the collector and pay the $150. My suggestion is to speak to a supervisor at the collection company and explain that you were blindsided by this overdue bill. Ask if they would consider not reporting the account in return for you sending them an immediate payment.

On the other hand, if you believe the debt may not be valid, send a request by certified mail with return receipt requested, asking for verification of the debt. After disputing the debt with the collector, go online to the credit bureau reporting the collection account and dispute the item with the bureau. If the account cannot be confirmed by the bureau as a valid debt, the bureau must remove it from your credit report.

For readers wondering how a five-year-old delinquency can show up without warning, the answer is that utilities usually don't report to credit bureaus. But accounts that are moved to an outside collection agency, or sold to a collector, get reported by the collection company. Just when the old blemish will show up, no one knows. My experience is that it usually pops up like a pimple on your credit report -- at the worst possible time.

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