A letter of explanation can resolve a lot of credit glitches. It's simple, free, and just might help you avoid late fees and lower credit scores. No less important, credit reporting rules give creditors the right to change what they have reported and even to reverse or delete items.
How letters of explanation help
A letter of explanation can help resolve tricky situations to your satisfaction. If you can write one effectively.
A good letter can help mortgage lenders justify approving you if you're a marginal or borderline applicant. Your chances of success are highest if you can show that the event causing the problem was out of your control and unlikely to recur. If, for instance, you filed bankruptcy because of a company-wide layoff (not your fault). And then you found work in a healthier industry (problem unlikely to recur).
You should try a letter of explanation to reverse late penalties if you can. Late fees and related charges are major income streams for creditors. According to a 2014 report from the Consumer Financial Protection Bureau, "the majority of debit card overdraft fees are incurred on transactions of $24 or less and that the majority of overdrafts are repaid within three days.
If your history with the creditor is good, and especially if you have had your account for many years, you have a decent chance of catching a break with a good letter.
Be very quick to head off adverse action by contacting your lender if you have a vehicle title loan. One late payment and you might find that your vehicle no longer works.
According to a 2014 report in The New York Times, car loan creditors now use starter interrupt devices which allow them to remotely disable vehicle ignitions when payments are missed. If you are one day late, contact the creditor and follow up with a letter. And pay when you say you will.
Related: 5 Credit Report Errors That Will Cost You
Credit reports & a letter of explanation
If you have a late payment you may not get a credit report ding. This is true for two reasons.
First, late payments do not show up on credit reports for at least 30 days.
Second, the credit process includes flexible reporting options for creditors. They can waive fees and reverse items sent into credit reporting agencies.
Creditors have good reasons to love juicy and profitable penalty fees so why would they reduce or eliminate them? While a penalty might be a good source of quick and easy income, the creditor's goal is to have customers who represent a steady stream of income and not just a one-time score. If you'll take the time to communicate with the creditor they may well react with action in your favor.
Step 1: Call
If you're late or expect to be late with a payment, call the creditor. Communication counts. Creditors want to know several things in a letter of explanation.
- Why is the payment late?
- When will the full payment be made?
Make sure your information is accurate. Be honest. Do not blame the creditor. Do not yell at the individual on the phone. That person may be authorized to help you, so why make an enemy?
Step 2: Ask
While you are explaining what happened to the payment, the creditor is busy looking at your payment history. If you have a good record - no late or missing payments - they creditor may offer to remove a late charge. Voluntarily. Why? To reward good payment behavior. And to continue the stream of income you represent.
What about late or missing payments in the past? Asking for help is not easy with past payment dings, but it doesn't cost anything to ask.
This is the moment when you say to the other person on the phone: "Can you please help me remove the late payment from my record? I know it was late and I am asking for a favor."
Okay, but why?
There are several good answers.
- First, things do get lost in the mails. If that's your excuse, consider volunteering for automated payments.
- Second, stuff happens. People wind up in hospitals, lose jobs and have family emergencies.
- Third, people have financial problems. But, be careful with this one. Many creditors want to be your highest priority.
Fourth, creditors hear a lot of stories. You need to stand out. Provide documentation.
Related: Can Rent Payments Help Your Credit Score?
A model letter of explanation
You'll want to get a mail or email address to follow up on your phone conversation. Don't delay. Write your letter of explanation immediately.
You want to write your own letter, in your own words. Don't use a form letter. Don't copy. Explain what happened, honestly and with all the details - even if some of the details are not in your favor. Check for spelling and grammar but the words themselves must be from you. If using email, include the employee's name in the subject line to stand out (Ms. Smith, Regarding the Jones Inquiry).
The letter might look like this:
Dear Ms. Smith:
Thank you for taking my call today.
This letter of explanation is to ask Universal-Global Credit to reverse a late fee associated with my account, #123-456-789.
I believe the fee should not be charged for several reasons.
First, I have an excellent payment history with your company.
Second, in the case of the October payment, a medical emergency caused my checking account to be depleted. It would not benefit any of us to receive a bounced check. A copy of my hospital invoice is attached.
Third, you can be assured that in the future I will seek to continue my excellent payment record.
Thank you for your help in this matter.
Sincerely,
Thomas Jones
123 Main Street
Somewhere, USA 12345
Email: [email protected]
Phone: 555-123-4567
Mortgage application letter of explanation
Mortgage loan applications are a special case. Letters of explanation are commonly used to help underwriters better understand your past financial problems or negative credit report items.
In considering such letters of explanation, the usual rules apply. You have to use your own words and tell the truth. Documentation is a big plus. A model letter of explanation might look like this:
Mr. Smith.
It was good to speak with you today regarding my mortgage application.
You asked about a late rental payment from four years ago. This did happen. The payment was late. However, the payment was late because I was on active-duty military service overseas. Normal communication systems were not available because of my activities in a combat zone. A copy of the orders showing my period of service overseas is attached.
Thank you for your help.
Sincerely,
Mary Jones
123 Main Street
Somewhere, USA 12345
Email: [email protected]
Phone: 555-123-4567
There's no cost for a letter of explanation, but the results can be financial savings as well as faster and better loan application outcomes. For more information, speak with mortgage loan officers to see what information they need.
