Collection accounts on credit reports can ruin a credit score. There are several ways to handle collection accounts and it really depends on whether the collection account is recent; if the collection account has been sold to a junk debt buyer; and your end goal in dealing with a collection account.
You should check your state’s statute of limitations on credit card debt. The reason is you want to see if you can be sued for the debt. Once the statute of limitations has passed you can no longer be sued in court. You still owe the debt and it can appear on your credit reports for 7 years but you no longer have to worry about a judgment or wage garnishment. If the debt has not passed the statute of limitations a collection agency can take you to court.
First – Make sure any current credit accounts are paid on time and the account balances are not near the credit limits. In other words create a positive credit history to outweigh the older negatives on your credit reports. The credit scoring formula primarily looks at the last 2 years of data to calculate your credit scores so make sure you have some positive credit accounts being used to calculate your credit scores.
Second – Decide if you want to dispute collection accounts. Collection accounts that are 2 or more years old and have been purchased by a junk debt buyer are probably in the best position for a successful dispute. Junk debt buyers just want your money. They will settle for almost anything because they have literally paid pennies on the dollar for your debt. But they are also subject to the Fair Debt Collection Practices Act and Fair Credit Reporting Act which makes them vulnerable to consumers who know their rights. If you choose to dispute collection accounts here are a few tips.
Third – If the collection accounts are fairly recent like within the last 12 to 18 months consider a Pay for Delete Offer. You can make an offer to pay them, conditional upon their agreement to delete their reported collection. Find out more about a pay for delete offer.
Fourth – Consider doing nothing if collection accounts are 48 months or older. As a negative account ages the less it affects your credit scores. Collection accounts that are 48 months or older are not being factored into your credit score. But that can change if you do something like reach out a collection agency or even settle an old debt.
If you decide to settle an old debt you run the risk of having a recent paid collection on your credit file. The time the debt is supposed to be deleted does not change but the “date of last activity” can change and for some reason the credit scoring system views it as recent negative activity. Paying an old collection may have the adverse effect of decreasing your credit score.
Another problem is when the collection account is being reported inaccurately. It may be reported as a revolving debt making it look like the debt is currently in default. If you settle the debt, this has the perverse impact of causing the credit score to plummet even further, since activity has been updated to the current time period.
Fifth – Contact the original creditor to see if they will take an offer to settle. If the original creditor still owns the debt and has not sold it to the collection agency, make an offer to pay them, conditional upon an agreement by the original creditor to first terminate the collection authority assigned to the debt collector. Termination prior to payment of the debt then requires the debt collector to delete their collection account from your credit report.
If you agree to pay in full or make payments then keep these tips in mind:
- It does not improve your credit score to settle an old debt unless the item is completely deleted from your credit report. If you can agree to a deletion get all agreements to delete the accounts entirely off your credit report in writing prior to paying any amount towards the debt.
- If you decide to settle the debt then by all means do so but make sure it is in your budget to pay and ask they list the item as: “Paid” and not as “Settled”. Both still end up in the negative category of your credit reports but “Paid” looks better than “Settled.” There are instances where you absolutely must pay a collection account especially if you’re in the market for a mortgage loan.
- Do not provide bank account or credit card account numbers, only pay by Cashier’s check or Money order. Keep originals of all agreements.