Last updated on December 15, 2020
Folks can experience financial problems at any time — problems that muck up their credit reports and hamper their access to new credit. However, a well-written letter of explanation attached to a credit application can make a big difference.
Many lenders will go the extra mile to accommodate consumers that can explain past problems and offer assurances that the problems have been remedied. But first, it’ll be a good idea to check and see whether you have bad credit at all. When’s the last time you checked your credit score? Check with each of the three major bureaus to get a complete view of your financial profile, as the information reported to each bureau by creditors may vary.
To be effective, a good letter of explanation needs to observe certain rules:
The letter must be true — don’t over-exaggerate or lie. Simply state the facts, including your understanding at the time, the roles others played and, ultimately, why you were unable to pay your bills on time. Additionally, be sure to write the letter yourself; letters written by your loan officer or another party will hold less weight than one written by you.
To the extent that you were at fault, own up to your mistakes. If you truly were innocent or victimized, describe what steps you took and to whom you reported the incident.
At the same time, don’t wax poetic or hop onto your soap box; keep your explanation short and sweet, without a long, drawn out story you hope will garner sympathy.
Don’t Blame the Creditor
Blaming your creditor is a very bad idea, since you are trying to arrange credit from, well, a creditor. They will have little patience for a person who trashes one or more previous creditors.
Show receipts, letters, insurance policies, contracts and any other documents that will shed light on the problem and support your claims. Always send copies — keep the originals in a safe place.
Promise to Avoid Further Problems
To the extent you made avoidable mistakes, promise to never repeat them again. Additionally, demonstrate to your new creditor the lessons you learned — and the concrete steps you’ve taken to prevent problems from occurring again.
Sample Letter #1
Here is a sample letter you can use as the starting point for the one you create:
To Whom It May Concern:
I am sending you this letter and the attached documents to explain my late medical bill payments to XXXXX Hospital. This applies to late payments dated 5/1 to 6/15, 2012 for a balance of $45,971.
When this situation occurred, I found myself with a serious health challenge and inadequate health insurance. At the time, I worked for [company] and suffered a heart attack. Unfortunately, I had a pre-existing heart condition and the health insurer, XYZ Health Insurance, denied my claims for surgery and care related to the heart attack.
The illness drained most of my savings, and I was unable to pay my medical bills on time. The hospital graciously worked out a repayment plan with me, and I have not missed a monthly payment since we reached agreement.
I have taken the following steps to avoid this problem from ever happening again:
I have purchased health insurance policy through an Affordable Care Act marketplace that covers all pre-existing conditions. Please see the attached copy of the policy, which covers 80 percent of all costs.
I have opened and funded a Health Savings Account to help pay for my portion of future medical bills. Attached is a statement showing contributions to the HSA.
I have lost 150 pounds (please see before and after photographs), changed my eating habits and work out every day in the gym. My blood pressure is excellent, and I am in the best health of my life.
I have always taken great pride in my financial responsibility and hope you agree that I have executed the steps necessary to avoid a recurrence of this unfortunate incident. I hope you will approve my credit application, and I will be happy to provide any further information.
Sample Letter #2
Or, Have a Professional Handle it for You
You can always go the easy route and have someone do it for you, like a credit repair service that will also help to get your finances and credit back on track. Lexington Law is available to take your call, and, on average, their past clients have seen 10.2 negative items removed from their credit reports in four months.