Q&A on Debt

The credit card company issued the 1099C because it had given up on ever collecting the money from your friend. By sharing the information with the credit bureau, it was warning other companies that she's not a good risk because she doesn't repay her debts. In other words, the gross error was made by your friend, not the credit bureau.

Of course, the impact of her misdeed will fade over time, especially if she has paid her bills promptly since then. If the debt remains on her credit report after 2001, she would have legitimate cause to ask Experian to expunge the canceled debt from her record. Most negative information must be removed after seven years (or 10 years in the case of a bankruptcy).

Your friend may or may not have another problem. The Internal Revenue Service usually considers canceled debts to be taxable income to the debtor, which means your friend probably should have paid income tax on the forgiven amount in 1995.

Given that more than three years has passed, the IRS is unlikely to come after her now, but the agency is getting better about matching 1099 forms to taxpayer returns to figure out who should be paying what. Should she ever face this situation in the future, both her credit report and her pocketbook could suffer.

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Q: Just out of curiosity, I recently requested a copy of my credit report. I have friends who learned when they applied for a loan that there was a lot of erroneous information on their credit reports and that some of it was next to impossible to get removed. Long story short: There were credit cards from years ago that I cut up and tossed but that still appear as open accounts. I can easily contact the well-known companies. However, there are a couple of Visa and MasterCard accounts from banks that I do not recognize and have no idea where they are located. How can I find their addresses so I can write to them and close the accounts?

A: Good for you for checking your credit report; as you've discovered, the best time to learn its contents is well before you apply for a loan, so that you have plenty of time to dispute incorrect information.

You should know, however, that merely cutting up a credit card does not end your relationship with the creditor. Your ties continue at least until you pay off the debt; you should also send a letter to the creditor stating that you want to close the account and requesting that the creditor report the closure to credit bureaus as "closed by customer request." Otherwise, it could appear that the creditor canceled your account, which could hurt your credit score.

You may have to send your request more than once. Some creditors are incredibly slow about reporting accounts as closed.

If the banks don't have toll-free numbers listed with (800) 555-1212, the government can help. The Federal Deposit Insurance Corp., which insures bank deposits, has a nifty database on its Web site at http://www.fdic.gov. Click the "bank data" icon, and then use the 'institution directory" to look for your lenders. Under the "institution status" field, make sure you enter "all" rather than "active," because it may be that some of those banks have since merged into other banks--and perhaps more than once. In any case, you should be able to get an address for the ultimate buyer so that you can make your request. Consider calling the banks first to find out exactly which department should get your letter; otherwise it could easily get "lost".

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Q: We recently applied for a credit card with a lower interest rate with the intention of transferring our balance from a higher-rate card. We were denied by the bank because the credit report showed two negative things. The first was an erroneous rent-collection filing that originated in 1989 and that I have tried unsuccessfully over the years to get taken off my credit report. The second was what the bank said was a high ratio of revolving balances to revolving credit limits. What is this? Is there a magic line in the sand that we should not cross? How can we resolve this and get the card?

A: I can tell you all sorts of ways to improve your credit rating, but it's probably not going to matter to this company.

It sounds as if you were applying to one of those credit card companies that prides itself on an 80% to 90% rejection rate. These lenders offer low rates, but only to people with absolutely spotless credit. In short, they're looking for ways to say no.

Most lenders would ignore a 10-year-old blemish; in fact, it probably shouldn't still be on your report at all. You should contact Experian and the other major credit bureaus to remind them that collection actions, like lawsuits, judgments, tax liens and other negative information, should be expunged after seven years. (The limit is 10 years for bankruptcies.) Experian's number is (800) 682-7654; Trans Union is (800) 916-8800; Equifax is (800) 685-1111.

The second reason the company gave for turning you down is just a fancy way of saying you're carrying too much debt, at least for this company's taste. What's considered too much varies by the lender. Generally, people who are using much or most of their available credit--say, 75% of their credit limits--are seen as higher risks than people who use only 25% of their limits.

Generally, credit counselors will tell you that spending more than 20% of your take-home pay on credit cards, car loans and other non-mortgage debt is too much. The smartest consumers pay off their bills in full every month.

If you want to improve your credit rating, start diligently paying off the debt you have. You can check http://www.cardweb.com for a list of lower-rate cards. I'd look for one in the 9.9% range. You could also try calling your current credit card companies and see if they'll lower the rate.