Charge-offs irreversible, even if co-signer not notified of debt


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question Dear Speaking of Credit,
My wife opened a line of credit with a credit union in 1984 and signed me as a co-signer. She passed away in November of last year. No bills were sent to my home. Six months later I was refused credit and checked my credit score, which had gone from 805 to 627. The credit union had charged off $3,300, which I was unaware of. I immediately paid off the balance in full and asked them to contact the reporting bureaus and have those months removed from my report. They said that's "impossible." Now my credit is ruined. Question: Is the credit union correct and if so do I have any other recourse to restore my credit? Thanks. -- Robert

Answer Dear Robert,
I'm so sorry for the loss of your wife. It's easy to see how not being aware of a debt she incurred and having not received the bills could result in the situation you describe. I'll provide you with some next steps to take and explain how this charge-off and future actions -- or inactions -- may impact your credit scores.

After 40 years in the credit business, there are very few situations that surprise me. Still, I have to say that the lack of sensitivity, not to mention just plain abysmal customer service displayed by the credit union toward a 30-year customer, surprises me. To be fair, however, I will have to at least give the representative(s) to whom you spoke some credit for accuracy in stating the reason for their refusal to resolve this matter to your satisfaction.

Due to various accounting and credit bureau reporting rules, it may actually be "impossible" for the credit union to dial back the months of delinquency from a charged-off account's credit history, submit such corrections to the credit bureau, and reopen the line of credit to where it would look like no payments were ever missed. With accounts in less serious states of delinquency, such as 30, 60 or 90 days late, they can make such corrections. But not once an account has been charged off.

The credit union is also under no obligation to correct the reporting of this account to the credit bureaus -- other than to update it to "paid" charge-off -- since they can argue that the account was, in fact, charged off due to the lack of timely payments before being paid.

What the credit union can -- and in my opinion should -- do is:

  1. Stop reporting the charged-off account to the credit bureaus each month, if they haven't already.
  2. Instruct the credit bureaus -- Equifax, Experian and TransUnion -- to delete the account entirely from your credit reports, as well as instruct any collection agencies to which the debt may have been assigned to do the same.
  3. Open a new line of credit for you, though unfortunately, it will most likely have to include a new "open date," resulting in your 30 years of positive credit history for that account being lost.

With the granting of at least these first two requests, your credit score should improve significantly, as soon as the charged-off account is removed from your credit report. If it does, but not to the 805 score you had achieved previously, the shortfall will most likely be the result of losing some good credit history along with the bad caused by the deletion of the account.

As for the third item above, if you are successful with the first two, you should also insist that the credit union open a new line of credit for you, even if after this experience you have no desire to ever do business with them again. Why?

As is often the case with credit scoring, the need to replace the now-lost line of credit lies within the scoring calculations that evaluate "credit utilization," the measurement of how much of your available revolving credit (card credit limits and lines of credit) you're currently using. Credit utilization, makes up almost 30 percent of your score, with credit lower utilization percentages indicating less future risk and resulting in higher scores.

So, depending on any balances owed on your cards or other revolving lines of credit, replacing the credit availability you lost when the credit union first closed, and then (hopefully) deleted, the account could help reduce your current overall utilization percentage and return your score to as close to its earlier heights as possible.

You may have to face the reality of a charge-off on your credit report for seven years from the date it was written off as a loss.

Now comes the hard part: getting the credit union to make these changes. Since you've already had a taste of the "can't do" attitude, I suggest escalating your situation to the top of the ladder by first finding out the names of the president, CEO (if different from the president) and members of the board of directors, and then writing to them. In your letter -- preferably sent via certified mail with return receipt requested -- state your case as you have to us, stressing that you were unaware of the debt and did not receive any bills before you were denied credit. Then upon checking your credit report, you discovered your late wife's debt and promptly paid every penny.The National Credit Union Administration has a "Research a Credit Union" tool online that can help you find executives' names and contact information.

Unfortunately, even if you do all of the above there remains the possibility that all your efforts could be for naught. If so, you may have to face the reality of a charge-off on your credit report for seven years from the date it was written off as a loss. Yet even in such a seemingly dire situation, there remains a light at the end of the tunnel with regard to your credit score.

That light is the way in which the "recency" of a negative item, such as a charge-off, weighs most heavily within the all-important "payment history" scoring category (35 percent of your score). Recency refers to the length of time since the most recent negative occurrence on your credit report, and carries more importance than how frequently late, or even how severely late, an account may have been. With the passage of time the negative scoring impact of the charge-off will lessen and your score will increase steadily, as long as all of your other credit accounts remain in good standing, to where you could have a score well into the 700's within a few years.

While you clearly have your work cut out for you, Robert, I believe you will be successful by appealing to the credit union higher-ups' sense of fairness and goodwill. All the best to you!

See related: Replacing a credit card after husband's death, Closing joint bank accounts after a breakup, Divorced woman still cleaning up ex's financial mess

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Published: October 23, 2014

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