What Should I Do About Collection Accounts?
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 through something called a letter of deletion.
A letter of deletion is basically a letter from the creditor or collection company telling the credit bureaus that the item was sent to collection erroneously. When you get a letter of deletion, the collection activity (but not the late payments that preceded it) will be wiped from your credit report. This strategy allows you to pay the collection, which is the right thing to do, while protecting your credit score.
That said, getting a letter of deletion is easier said than done. Oftentimes, the credit bureaus will try to trick you into accepting a letter of payment, but don’t fall for this trick. A letter of deletion is not the same thing as a letter of payment. A letter of payment simply states that you have paid the collection account. A letter of payment is useless, but a letter of deletion actually tells the credit bureaus to remove an item from your credit report.
Other collection companies will simply refuse to provide a letter of deletion, but you can still negotiate.
In fact, let’s go over your options, starting with the best case scenario.
Option One: Pay the Collections Account in Exchange for a Letter of Deletion
You could immediately pay the collections account, in exchange from a letter of deletion. Now, you could either pay in full or, if you cannot afford the full amount, try to negotiate for a smaller one-time payment to settle the account and receive that letter of deletion. 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!
Option 2: Make Payments in Exchange for a Letter of Deletion Upon Final Payment
If you cannot afford to pay the account in full, or if you are unsuccessful in negotiating a smaller one-time payment, you can always offer to make payments in exchange for a letter of deletion upon final payment. This option is extremely risky. If you miss a payment, your score will take a nosedive, which will be particularly painful if it nullifies your agreement to receive that letter of deletion. So use his option very carefully.
Option 3: Ask That the Payments Are Not Reported to the Bureau
Sometimes you will be unable to negotiate a letter of deletion, no matter how hard you try. So what can you do? Make a full payment in exchange for a promise from the collection company that it will not report the payment to the credit bureaus. Stopping the creditor or collection agency from reporting this information will stop your score from dropping when you pay off the balance.
Now, this option could cause a problem down the line. If you buy a house, some banks will insist you pay your collection accounts before you get the home loan. And if the collection company hasn’t reported your payments (per your request), your credit report will show that you have an unpaid collection account. If this happens to you, you can always call the collection company at close of escrow and ask them to report the account as paid in full. Waiting until close of escrow will help preserve your credit until the last possible minute, so we suggest delaying your request until then. You could also get a letter of payment, which won’t help your credit score, but will help you prove to the bank that you’ve paid the collections.
Finally, Option 4: Make a Payment
You might be dealing with a hard-nosed collection company that won’t provide you with a letter of deletion no matter how many times you try. You might be dealing with a collection company that will not stop reporting to the credit bureaus. If this is the case, then start negotiating to pay the least amount possible. Some people negotiate to pay 10 or 20 cents on the possible.
Remember, you could get sued for failing to pay your bills, so if you are worried about the affects of a judgment on your credit report, start negotiating. Try to be strategic—if you plan on buying a car, for instance, wait to start the negotiation process until you’ve bought the case. This way, you can preserve our credit score unitl you’ve already secured a low interest rate.
This is a complicated subject, so if you have a collection account, consider taking our 720 Credit Score Challenge.