Here is the riskiest option for dealing with collections account on credit report. In fact, before you read about this option, I should tell you that I think paying your debt is your responsibility. It is always the right thing to do.
Collections Account on Credit Report: Option #4
But some folks do not suffer from a crisis of conscious, so they want to employ this option for dealing with a collections account on credit report. They simply refuse to pay the collection item, arguing these pros:
Your credit will be only nominally affected four years from the last payment you made on the account, and it will being to improve significantly in as little as two years. And of course, if you do not pay the collections account on credit report, you have lots of room to try to negotiate for a letter of deletion down the road.
But before you employ this option, be sure you know about the cons:
- You could get sued.
- Creditors will continue to contact you.
- Your will never satisfy your agreement with the creditor.
The best way to handle a collections account on credit report is to negotiate for a letter of deletion. But the truth of the matter is this: Sometimes you will be unsuccessful. Here is your third option for dealing with those pesky collection accounts.
Collections Account on Credit Report: Option #3
You could always make payments on the collection item. This is one of my least favorite options. Most of the time, I think you are far better off saving the money and making one payment. However, if you have a problem saving money, and you feel obliged to satisfy your agreement with the creditor, this might be the best option for you. Keep in mind that your score will drop each time you make a payment.
The pros of this option follow:
- Eventually, you will satisfy your agreement with the lender.
- If you are able to negotiate a payment plan, the collector will stop calling you and probably will not sue you, so long as you pay on time.
- You can always call back and try to negotiate for a letter of deletion while you are making payments.
- You might be able to negotiate for cents on the dollar.
- If the debt is more than two years old, you might be able to convince the creditor to stop reporting payments to the credit bureaus so that your credit score can be preserved.
Like I said, making payments on a collections account on credit report is one of my least favorite options. Here are the cons:
- If you are unable to negotiate for a payment plan, you might be sued, and the collectors will definitely keep calling you.
- If you do not negotiate to have the creditor stop reporting to the bureaus, your credit will keep being dinged, and you will not be able to make significant improvements to your credit score until you have paid the debt in full.
If you choose this option, be sure you know how to fix credit! And be sure to read about the other options for dealing with collections account on credit report.
In my last post, we talked about the first option for dealing with a collections account on credit report. This week, let’s talk about the second option.
Collections Account on Credit Report: Option #2
You could always wait for the right time to pay the collections account on credit report. If you are planning on making a purchase in the near future, paying a collections account might not be wise as it could hurt your credit score. In this case, just wait until you have made the purchase, then pay the account. The pros of this option:
- First, you will eventually satisfy your agreement with the creditor. There is a certain amount of peace of mind in fulfilling an obligation. The phone calls will end, the worries will end.
- You might be able to negotiate for a letter of deletion when you do make the payment.
- This will allow you to delay the damage to your credit score until after you have made your purchase and secured decent interest rates. This is particularly true if you have not made a payment on the account in more than two years. If this is the case, your score probably isn’t suffering much from the past mistake, so paying it could cause an okay score to turn into a bad credit score.
The cons: You will prolong the suffering. if you wait to pay the debt, your credit score will likely drop in the future. And in the meantime, creditors and collection companies will continue to hound you about the payment. And let’s not forget that you can always be sued for failing to pay a debt.
Still, this might be the smartest strategy if you are unable to secure a letter of deletion now, and you plan on making a large purchase in the future. Keep in mind that some banks will insist you pay a collections account on credit report before giving you a home loan. As you know, paying your collection could damage your credit score, so this is risky business. The last thing you want to do is hurt your credit and have the lender pull your credit report again! To avoid this sort of repercussion, pay your collection at the close of escrow. This way, you will preserve your credit score until the last possible minute.
If you have a collections account on credit report, the first thing you should do is read our article about addressing credit collections head on and attempting to negotiate for a letter of deletion.
The truth of the matter, though, is that sometimes you will be unable to negotiate for a letter of deletion. If this is the case, you have four options:
Collections Account on Credit Report: Option #1
You could immediately pay the collections account. The pros of this are pretty straightforward:
- As long as you take all the necessary steps and learn how to fix credit, your credit score will be only minimally affected after just two years.
- If the collections account appeared on your credit report in the past few months, your credit score is suffering regardless, so this option will not significantly lengthen the amount of time your score suffers from the slip-up.
- You won’t be sued for failing to pay the debt.
- Your agreement with the creditor will be satisfied in full, so those harassing phone calls will stop!
Now let’s take a look at the cons:
- Your credit score will probably take a hit. Remember that paying a bill in collections often causes a person’s score to drop.
- The item will remain on your credit report for seven years. You will have no leverage to negotiate for a letter of deletion.
If the collections account on credit report is relatively new, and you don’t plan on making a large purchase in the next two years, this might be your best option. Be sure to pay the debt instead of making payments. Remember that each time you make a payment on a collections account, your score will take a hit.
If you choose this option, try to negotiate a smaller payment. A lot of creditors will settle for cents on the dollar, especially if you have a bad credit score and they think you might enter bankruptcy. After all, they would rather receive something than nothing!
Here’s another tip you might want to consider: In some cases, you might be better served by asking the creditor not to report the payment to the credit bureaus. I know this seems counter-intuitive, so be sure to read Chapter 6 of 7 Steps to a 720 Credit Score before taking action. If the collections account on credit report is old and you have not made payments for the past two years, the payment might hurt your score. Asking the creditor not to report the payment could preserve your existing score.
Among the most-asked questions about credit scores is this: What do I do about my credit score if I have a collections on credit report?
For sure, having a collection account on your credit report is a big deal. Creditors will be unlikely to grant you a loan if you do not pay your bills. Though a collection account is not as big of a deal as having foreclosure or bankruptcy facts on your credit report, your credit score will suffer.
And though it sounds crazy, making a payment on a bill in collection might cause your credit score to suffer again. Bills that have been turned over for collection hurt your score only a bit after two years, but as soon as you make a payment, your score will be damaged again. As well, making a payment renews the seven-year period in which an item stays on your credit report.
So what do you do about those pesky collections on 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.
Especially in today’s economy, you might be able to negotiate to pay less than the full amount of the bill. Though this doesn’t remove the collections from your credit report, paying a lesser amount can surely help your pocketbook!
Better yet, consider negotiating for both a smaller payment and a letter of deletion.
Not to be confused with a letter of payment, a letter of deletion is basically a letter they send to the credit bureaus saying that the bureaus should remove the collections on credit report. This is obviously the best-case scenario. Your credit score will surge if you can get a letter of deletion that wipes the collection from your credit report!
Qualifying for a letter of deletion is tricky, though. This technique will work best if the collection item was not correctly sent into collections.
The Fair Debt Collection Practices Act limits the ways creditors and collection agencies can contact you. If you believe that they have violated the Act, you might be able to get a letter of deletion, so long as you promise to pay the collections on 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.