Step Six: Address Credit Collections Head-On
Did you know that each time you make a payment on a credit collections account, your credit score could be damaged?
It’s shocking but true.
When you are 30 days late on a bill, a creditor will report a late payment to the credit bureaus. This happens again at 60 days and again at 90 days. Once you are 120 days late, the bill will typically be turned over to a credit collections company. Each late payment causes your score to drop, and the collection causes it to drop even more.
It would make sense that once you paid the credit collections, your score would increase. But this isn’t the way the credit-scoring system works.
A collection notice will stay on your credit report for seven years from the date of last activity. So each payment on a collection account renews the seven-year time-frame and causes your score to drop again
If you have credit collections, your goal is not negotiate with the creditor to stop this from happening. You have several options:
- Pay the balance in full in exchange for a letter of deletion. A letter of deletion is not the same thing as a letter of payment. A letter of payment is useless, but a letter of deletion actually tells the credit bureaus to remove an item from your credit report.
- Make payments in exchange for a letter of deletion upon final payment.
- If you cannot successfully negotiate for a letter of deletion, but you want to pay the balance, simply ask that the company stop reporting to the credit bureaus. This prevents your score from dropping further.
Regardless of which option you choose, you should consider negotiating to pay a smaller balance. As a reminder, a lot of creditors will allow you to settle for cents on the dollar. One of my clients was able to settle for 20 cents on the dollar!
This is a complicated subject, but removing a collection account is one of the fastest ways to increase a credit score. I suggest that you review 7 Steps to a 720 Credit Score for a complete explanation of credit collections.