Best way to Clean Up Credit

I’ll make a long story short and say that 2 years ago I lost my job and moved to Georgia. Things got a little dicey and I had to default on a few credit cards. The limits were not high and some of it was circumstantial. I am not immoral and I due feel an obligation to repay my debts. I have years of good payments, followed by a year of missed payments.

I am about to start looking for a mortgage as I now have a great job with dependable income. I am also ready to repay this debt, but I would like to do so without being gouged, or further hurting my credit score. Right now it sits at a miserable 524.

The two credit cards were about tripled with non-payment charges and interest. After this they were sold off to debt collection agencies. Unfortunately both the original and the bought debt are showing up on my credit report.

Who do I rightfully owe, now? The bank/credit company or the collection agency? Will repayment with one satisfy the other? I would like these blemishes to be removed from my credit history if possible. I am willing to pay the entire amount if necessary, but could I offer the original amount and see if they will bite?

I’m at this amazingly awkward point financially where I live quite comfortably (to my standards; 4 squares heat and electricity, and of course interenet access) but have to make my income look good (mortgage, etc) and bad (student loan repayment, etc).

Any help would be much appreciated.

There is no GQ for this; it’s too complicated for a simple answer.

As to who you owe, you’d want a lawyer for who you actually owe on the collection accounts. SDMB doesn’t give legal advice.
In some cases you owe the CA because they bought the debt. You do not owe the original creditor (OC) in those cases.
In some cases you owe the OC, and the CA is trying to get the money from you, acting as the agent of the OC.

I’d call these guys and see if they can help you:
http://www.lexingtonlaw.com/

If you plan on paying the CAs and OCs, and are okay with them showing on your report as paid, then you might want to look into Rapid Rescoring.
Some lenders offer this service, and some private firms.
This is an example:
http://www.rapidrescorecredit.com/

I can’t endorse ANY of the links above, but I can suggest that you research further on your own, and see if the Lexington Legal guys can drop any bits of wisdom on you.
You should also contact the lender you’re trying to work with and see if they have any clues for you.

Even if you do pay everything back, the delinquent payments will show up on your credit report for some time and affect your score. One thing you can do that may help is to add a consumer statement to your credit file, after you have paid the debts off, that explains the situation. I did this after my brother’s repossession (I was the cosigner) and it seemed to help.

Thanks for the advice so far! I had considered a credit councelor but have read in many places that doing so might hurt my credit.

For the record, also, my debt is not large: A $300 CC and a $1200 CC.

Kimballkid: The note is a great suggestion and I will certainly do so! As for the repayments; are you certain?

I have read so much conflicting information on this subject it seems as though there are no hard and fast rules.

He is correct, even if you pay in full tomorrow the items would still show as having been late in the past in a month or three once your files update.
The law firm and agency that does rescoring are NOT like CCCS or certain other credit repair\debt elimination firms. I do not suggest that you use firms like CCCS.

Also, be aware that if you negotiate a lower payback amount than they say you owe, you will be taxed on the difference as income. For example, say that they claim you owe $900 on the $300 CC - if you negotiate it and wind up only paying $300, they will send a form to the IRS reporting that you got $600 income from them, which can be a shock at tax time when you owe more than you had planned.

ETA: It’s still worth it, just be prepared!

I used to do the programming for reporting our student loans to the credit bureau and still have the manuals. Here’s what will show up on your credit report if you settle for less than you owe: “Paid in full for less than full balance” (Special Comment code AU, but you’ll never see that).

Also, just because an account is paid in full doesn’t erase all the past history on the account.

Also, my mortgage lender told me they wouldn’t even look at someone who was in credit counseling.

Also, my brother’s repossession just dropped off my report this year because it finally reached the 7 year limit.

I’ve heard that credit counseling completely hoses you from a dozen sources, so I concur.
The firms I linked appear to center their practice around fixing your report by getting items removed or modified to reflect newer, more favorable information.

The CCCS and clone firms:
EXAMPLE: http://www.apprisen.com/
TRADE GROUP: http://www.nfcc.org

focus on getting your debt paid or settled.
Those are horrible for your credit. They are basically collection agencies in disguise.
IIRC, most people who use them drop out of the programs, which is a bad sign.
These might do some good for somebody, I suppose.

Edited to add:
My feelings about CCCS type agencies are mirrored by this attorney:
http://www.silverbankruptcy.com/Alternatives.html

To the OP, why do you feel the need to get a mortgage right now? Your credit score will be hosed for a couple of years. You would likely end up with a very expensive mortgage APR even if you can get one. Just wait it out - rent for a few years, until things move into the past. All of your protestations to the contrary, your troubles were recent, why should anyone believe you if you say the future will look different?

The best way to clean up credit is a combination of paying your bills and time passing. You’re on track with the first part, you need to let the second part play out.

I forgot to address this part: you owe the collection agency. And, yes, repayment to the collection agency will satisfy the credit card company that’s why they hired the collection agency to collect it. Also, if you can give them a very compelling reason (and I mean very compelling) you may be able to get the credit card company to recall the debt from the collection agency. It’s difficult, but not impossible. The reason you are seeing both on your credit report is that the credit card company assigned it to the collection agency, but did not close the account as the money is still owed. It should say something like: “Assigned to collection agency” on those tradelines. Once again, just because a debt has been paid off or assigned, it doesn’t disappear from your credit report.

Knocking fully-paid derogatory tradelines off is also a good part of a decent strategy to get your credit back on track.

One thing people never seem to do until it is way too late is to talk to the original creditor to see what options there are. They would much rather work with you to get something than to have you default.

This is not nessesarily true. Relief of Liability can be taxable income, but not if you are insolvent, which many Americans are.

OP, two other things:

You can sometimes negotiate a clean credit report as part of the payment settlement. Not entirely kosher, but it is still done.

Be very very careful (this applies to everyone, not just the OP) when paying a Collection Agency. Debts are not hard to find, and there are a lot of scam CA’s who will take your $$ and disappear, and you will still owe the debt. If at all possible, deal with the original debt company only. This contradicts Kimballkid, who is assuming a legit CA- but there are many who are not legit, and there’s very little way for a consumer to know. So they know about the debt? Big deal. How do you know they really are the CA selected by the OC? If they are not, you are out the funds and you still owe the debt.

Save up a bunch of money, and tell the place you want to get a mortgage from that you’re willing to pay 20% down.

Your credit score could be negative infinity, and the bank still won’t turn down a big pile of cash.

But you’ll pay twice the rate.

A phone call to the original creditor (OC) should be able to clear this matter up for you. They’ll generally know if they sold off the debt.

And to whom? And what the exact legal name of that company is, and are they still DBA that name? And their phone number or website, just in case the scamsters are just pretending to be “ACME Collections”?

Unless you can confirm all of this, I would not pay any money to a CA.

All good advice!

Sorry, I was just going by the way things are done here. Our debts are assigned, not sold, to collection agencies and we pay them a fee (which is redeemed from the debtor). That’s why I said we hire them, they work for us. At any time we can recall the debt from the collection agency if we wish. It is very rarely done and it makes the collection agency unhappy.