Many of us recovering from a financial setback in which bills went unpaid for an extended period of time wind up with accounts in collections. There are different approaches you can take to solve debt problems that result from a cash crunch. But there is another side to debts in collection – the credit crunch. While your credit score may not be the number one priority when you’re in the midst of dealing with a serious debt problem, you may eventually look to reestablish your credit again. And those collection accounts and debt collectors can stand in your way.
Once your bills reach the stage in which a collection agency or debt buyer has them, your credit report has likely already been damaged. And your credit score… well, let’s just say you’ve fallen and you can’t get up (for now). Going forward, however, the decisions you make about your debts today can help set you up for credit success tomorrow. So you may be having the same questions that I’ve been asked over the years by many people whose debts I’ve helped resolve in collection.
Here are 10 common questions about credit scores and debt collectors I receive consistently.
1. What should I do when I make a debt collector an offer to “pay for delete”?
Pay for delete is offering to pay a debt in full, or for less than what you owe, but only if the negative item is removed from your credit report. And pay for delete can backfire when you are trying to settle a debt for the best savings. By requesting the account be deleted, you are telegraphing that you have a credit goal the collection account is holding you back from. This can lead to debt collectors holding out for more money in any agreement you negotiate, and in some instances, not agreeing to any balance reduction at all. Pay for delete letters rarely work. In some inconsistent one-off events I have seen people succeed in getting medical bills and utility bills that had been sent to collections removed from their credit report. But success here is a long shot at best.
2. How much will my credit score increase if I pay off the debt collector?
Paying an older collection account does not increase your credit score by itself. When you pay a debt collector that is reporting to the bureaus, you can expect them to update their reporting to reflect that you no longer owe the debt. The fact that you have less debt overall can help your credit standing, but do not expect an immediate benefit to your credit score from settling up on past bills.
I should point out that someone who has, for example, one or two accounts in collections alongside 10 open and positive accounts on their credit report will see an improvement in their credit more quickly than someone with 10 negative items and only one or two positives.
VantageScore now offers a credit score that does not factor in paid collection accounts. While this is great news, this newer version of VantageScore has not been widely adopted yet. But I look forward to it gaining broad use, and I hope FICO comes around to offering similar scoring models in the future.
3. If a debt collector says they will mark my file as a “refusal to pay,” how badly does that hurt my credit?
None. Your credit report typically already shows late pays by the time a debt collector gets your account. Those late pays already reflect the “refusal” to pay, even if it is the result of your “inability to pay.” It is possible that a debt collector has a box to check, or the ability to make a notation, that equals a refusal to pay. But this is just an effective collection tactic. It does not change anything on your credit report.
4. How do I get a judgment removed from my credit report?
Courts do not send the record of judgment to the credit reporting agencies. But judgments are a matter of court record, which is public information. There are companies that specialize in gathering information from the courts, and typically send this type of data to the credit bureaus. In order to get a judgment removed from your credit, you would want to go to the source, which is the court record. There are sometimes viable ways to get a judgment set aside or vacated. You should consult with an attorney that specializes in debt collection defense about how this might work for you. It will cost money to take this approach, with no guarantee of success.
You can pay or settle judgment debt for less in order to get the court record updated to show the judgment has been satisfied. And judgment debt will typically fall off your credit report 7 years after the date it was entered in the court record.
5. Will settling or paying a collection account cause it to stay on my credit report for 7 more years?
In general, the statute of limitations for a negative item to remain on your credit report, such as unpaid credit card debt, is 7 years from the date your account was charged off. Paying off your old delinquent debt, or negotiating a lower payoff, whether all at once or over a period of months, does not add any time to how long it stays on your report. You should monitor your credit reports to be certain that any collection entry that appears, in addition to your original lenders reporting, ages off your credit at the same time as the original negative item.
An exception to this would be if you were sued and a judgment was entered in the public record. Judgments have their own fresh 7-year credit reporting shelf life.
Be sure not to confuse the statute of limitations for negative items to remain on your credit report with your state statute that limits how long you can legitimately be sued for collection.
6. Can I negotiate with my credit card bank, or start making payments again, and get them to remove a charge-off?
Once your lender charges off your debt as a loss, you typically cannot get that changed. You can certainly pay off the balance, or negotiate a lower payoff, and that can help you in your efforts to rebuild your credit over time.
7. Why is a debt collector reporting a different balance owed than my original creditor?
Depending on the agreement you have with your lender, interest can continue to accumulate on your debt while it remains unpaid. Unfortunately, it can be difficult to duplicate a debt collector’s interest calculations, making it tough to determine whether the balance and the added fees are accurate. Balance accuracy is a very real concern when you are dealing with debt collectors, especially when you are looking to resolve older debts. You can certainly take steps to validate amounts owed to a debt collector, but you should be cautious if you can still legitimately be sued and have no intention or ability to resolve the debt.
8. Why are there inquires from debt collectors on my credit report?
Your credit report contains useful information to a debt collector. Debt collectors monitor credit reporting activity and look for signals that would suggest a debt is more collectable. If you are paying other bills on time, have applied for new credit, or recently paid some other collection account – these are all key bits of data that could cause a debt collector to view you as more likely to pay.
Debt collectors pay the credit reporting agencies for access to this information, and are deemed to have a permissible purpose to make these inquiries, similar to lenders who are looking for new customers to solicit with their credit product.
9. If a debt buyer agrees to accept less than what I owe as payment in full, how bad will a
“settled for less” mark on my credit report hurt my credit if I cannot pay my debt in full?
If a debt buyer has your account, your original lender is likely already reporting late pays and the fact your account was charged off. Your goal at this point may be getting any collection balance to report a zero balance owed in order to qualify for a new home loan, or to get an existing loan refinanced. A “settled for less” mark on your credit report from a debt buyer doesn’t have a more negative impact on your credit score, however a “zero-balance owed” could be required by the lender in order for your loan to be approved.
10. Can I settle with a debt collector for less and get them to agree to report that I paid in full?
It rarely serves much purpose to haggle with a debt collector over whether an old collection account will be updated as “paid in full,” or “settled for less.” Here again, the fact that you are in collections generally means your debt went unpaid long enough to have caused irreversible damage to your credit report. Resolving debts in the most affordable way, and taking a patient and deliberate approach to rebuilding your credit again, is often the most realistic approach to take. Getting collection accounts updated as paid in full, even if you paid less, may have some extremely limited benefit to a manual underwriter for a specific loan product. But manual credit underwriting can often mean you have the opportunity to submit a letter outlining special circumstances. Otherwise, for better or worse, credit markets are overly automated with risk-based pricing that relies heavily on your credit scores.
All of my answers to the above common questions assume that you are dealing with debts you recognize as your own. However, there are several scenarios in which you have a legal right to dispute items on your credit reports, including debts that are not yours, or that are incorrect.
Debt happens. But everyone can bounce back from credit problems over time.
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