How to Write a Letter of Explanation for Credit Problems

How to Write a Letter of Explanation for Credit Problems
Eric Bank
By: Eric Bank
Posted: April 14, 2015's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Folks can experience financial problems at any time 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?

Do’s and Don’ts

To be effective, a good letter of explanation needs to observe certain rules:

Be Honest

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.

Take Ownership

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.

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.

Include Documentation

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. 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.

[Your Signature]

Sample Letter #2

Bad Credit Letter of Explanation

Or, Have a Professional Handle it for You

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