How Does a Collection Affect Your Credit Report?

When a financial meltdown occurs, you may not have the ability to pay your bills on time. Depending on the duration of the meltdown, you may receive one or more collections on your credit report.
Many people are concerned about collections on their credit report. In fact, one of the most frequently asked questions about a credit score is, “What do I do about my credit score if I have a collections on credit report?”
There is reason for concern because a collection account on your credit report is a big deal. It is usually a signal to creditors that you are struggling with paying your bills. As a result, most creditors will not consider you credit-worthy and will be unlikely to grant you a loan. Even though a collection account is a red flag on your credit report, it is not as bad as having a foreclosure or bankruptcy on your credit report. But please know that collections, foreclosure, or bankruptcy will lower your credit score.
Let’s assume your financial meltdown was temporary and you are now able to pay your bills on time again. You want to show your creditors that their trust in you to pay your bills was right. Therefore you want to pay off your collection accounts. As crazy as this may seem, paying a collection account lowers your credit score. Why?
Collection accounts hurt your credit score for two years. If you pay those accounts after not paying for two years, you renew the seven year period in which the item stays on your credit report. Even worse, your credit score decreases again.
So what do you do about those pesky collections on your credit report? Paying your bills is your responsibility, even if it causes your credit score to suffer. However, you can and should negotiate with the creditor or collection agencies to minimize the damage.
Negotiating with a creditor or collection agency is the best way to resolve a collection account. It is a win-win situation for both of you, if the creditor or collection agency is willing to negotiate because it is better to receive partial payment than no payment. Though this doesn’t remove the collections from your credit report, paying a lesser amount can surely help your pocketbook!
The best strategy is negotiating for both a smaller payment and a letter of deletion.
Please do not confuse a letter of payment with a letter of deletion. They are different! A letter of deletion is a letter your creditor or collection agency sends to the credit bureaus giving them permission to remove the collections on your credit report. Once the collection account is removed, your credit score will surge because the collection account is wiped off your credit report!  You have satisfied your debt as well as cleaned up your credit report. Awesome!
Qualifying for a letter of deletion is tricky though. This technique works best if the collection item was not correctly sent into collections. How will you know if it was or wasn’t correctly sent into collections?
The Fair Debt Collections Practices Act can help you know if your account was correctly sent into collections. This Act limits the ways creditors and collection agencies can contact you. If you believe they have violated this Act, you may be able to get a letter of deletion as long as you promise to pay the collections on your credit report. The most common violation of the FDCPA occurs when a collector fails to advise debtors about their right to dispute part or all of the debt within 30 days of first contacting the debtor.