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This chart using data from Experian highlights that for the average American, 71.7% of consumer debt relates to mortgages. This is followed by 10.1% for both student loans and auto costs.
If an account is 150 days past due it means that it can go to collections and at that point, the collection agency starts to contact you.
They want to get their money and so they’re willing to work with you. They generally don’t report anything to a credit bureau for at least a few weeks because of that. On the other hand, they could report it on day one.
Your best bet is going to be working with the collection agency. You want that debt paid before it’s reported. If they let you work out a settlement or payment option you may be able to avoid the hit to your credit.
How Do Debt Collections Affect My Credit Score?
If a collection is reported it starts as an ‘unpaid account.’ Unfortunately, it’s considered a separate account to the other one. So you end up with two negative accounts. The other one is marked ‘charge off.’
You could end up with a serious drop in your credit score of up to 100 points from that too. Of course, it’s going to depend on how you’ve been doing this far. If you had a great credit score and go to collections it’s going to hit harder. Not only that but it’s going to stay for up to seven years. Lucky for you it starts to be less of a problem each year until then.
How Long Do Collections Stay on Your Credit Report?
Any kind of collection could stay in your credit report for up to seven years from the time it was first delinquent. That means if you stop making payments the first day that the card is late becomes day one of your seven years.
Once that seven years passes all the information is automatically removed. You don’t need to do anything about it. It doesn’t matter if the account has been charged off or if a collection agency is trying to contact you. Day one will stay the same for both of the accounts that you now have.
Paid Collection Vs. Unpaid Collection
Some people make the mistake of thinking that paying off a collection is actually going to remove it from your credit report. That’s not the case at all.
In fact, a collection will be removed only in very specific circumstances. That means a potential lender is going to see that collection every time they look at your report.
If they do decide to give you the card or the loan you’ll at least pay more interest. That means it’s important to look at how to get rid of the collection at all.
Because your account is in collections it generally means you also have late payments reporting. All of that together is going to decrease your score further. But they may be able to be removed with the collection. If you take care of it right.
The Steps For Getting Collection Removed From Your Credit Report
The steps to remove a collection are very important:
1. Get Your Credit Reports Data
You want to look at your records and your credit report (you can get a totally free credit report every year, from AnnualCreditReport.com). Look at the records you have for the account as well, especially payment history and age.
According to the Consumer Financial Protection Bureau, a collection agency is required to provide proof of the debt within 30 days.
But they only have to do this if you request it. If they don’t it means they pay a lot off fees. That means you need to contact them through certified mail. Then let them know they have 30 days to respond because you have records of when you sent the document.
Credit reports should include information about whether or not the collection has been paid, what the balance is (if any), and the date the account was in default. If the original creditor is not listed on your credit report and you are unsure of their identity, contact the collection agency.
Then, you can compare the details of the credit report with your own records. Log in to the account listed to see your payment history with the original creditor if you have not kept any records.
Having all of your information is the first step.
Is Your Collection Data Inaccurate or Incomplete?
An agency that collects debt cannot report any information about your credit file that is inaccurate or incomplete. So if any of the information reported about a collection account is inaccurate or incomplete, you have the right to challenge that account with the agencies. They must confirm the information with the source. The source has thirty days to verify the information and investigate. If the creditor does not confirm within 30-45 days, the credit reporting agency must remove the incorrect information.
Don't pay the debt or collection on your credit card report if it isn't yours. You can ask the credit bureau to remove it using a dispute letter. You can dispute a collector's debt and ask to have it removed from your credit report if it has been there for more than seven years. If you can prove the origin of the delinquency, this is particularly true
From here, it’s important to note that the only way to remove collections early if it’s incorrect. If the account is wrong or it’s outdated you have the right to refute it. But you have to contact each of the credit bureaus to let them know.
2. Make a Payment or Negotiate “Pay-For-Delete”
Sometimes you can’t dispute the account and that leaves a second option. You can negotiate with the collection agency.
In this situation, you would offer a payment for the debt in exchange for having it removed from your report. You want to contact the collection agency and let them know that you would like to pay the debt.
Pay-for-delete is a request by the debtor to pay the debt in part or full. In exchange, the original creditor or collector agrees to remove the account from your credit report. This is typically used when debts are already being sold to debt collection agencies.
It may not be necessary to invest time and effort in a pay for deletion request. In calculating your credit score, the latest credit scoring models (FICO9 and Vantage score 3.0), don't take into account paid collection accounts. This means that once you have paid off a collection account, your score will not be affected even if it lingers on your credit report.
Then say that you will make that payment if they agree to remove the collection. Don’t let an oral agreement be the only thing you have. You want to make sure you have everything in writing. If you make a payment without a written agreement it may not be honored.
On top of this, make sure everything you send is certified mail. Also, make sure it’s return receipt requested. You’ll always know that your mail was received and you’ll have record.
Once you pay the amount that you agreed to make sure you keep checking your report. It could take a little time to have the account removed, but you want to make sure it goes away. If it does then great. If it doesn’t use the signed letter and proof of payment to dispute it with the credit agencies.
3. A Goodwill Deletion
For those who have great credit and have had a great credit score, it may be possible to contact the original creditor. You may be able to show that you’re not a risk by paying the debt and then ask them to remove the collection.
If you ask them to make a goodwill deletion you’re not technically breaking the rules, which is what a payment for deletion is. You’re more likely to get what you’re asking for as well.
You want to make sure you send it to a certified mail and get a receipt. That way you’re going to know it’s received. Make sure that you use the correct address for the creditor when you send it out as well.
You might be surprised how often this can and does actually work. And if you have the credit record to back it up you’re going to see it as a great option. Just look for a sample letter from one of the many online.
Consider Hiring a Credit Repair Service
Credit repair services can assist you to fix errors, disputing inaccurate negative entries and negotiating with creditors
You should be aware of the laws that govern how credit repair services operate and what they are allowed to do. Several non-profit credit counseling agencies, such as the National Foundation for Credit Counseling (NFCC), are available to help you dispute incorrect information in your credit reports. The NFCC offers free debt counseling services. They can review your credit reports and work with lenders to help you create a debt management strategy.
Be wary of companies or credit organizations that are looking to take advantage of you. You should make sure you find a reliable counseling agency. Also, be aware of red flags like hidden fees and lack of transparency. While credit repair agencies can be helpful, it is important to know what they can and cannot offer. A company promising to erase all negative items accurately is likely to scam you or engage in illegal practices that could come back to haunt your credit rating. Be realistic, be honest with yourself, ensure that the credit repair company you choose is trustworthy, and don't pay too much before any work is done.
The Federal Trade Commission recommends that consumers investigate each agency when searching for a credit counsellor.
What happens to my credit score if a collection account is closed?
Your FICO score is 35% dependent on your payment history. This means that your score could increase if you remove a collection account. The extent of the increase will depend on what other items are listed on your credit report.
If this negative account is your only credit report item, it may be easier to remove than if there were other collections accounts.
A collection reported to a credit agency doesn’t have to be a major problem. At least, not if you know what to do.
Even if you’re not able to get the account removed make sure you pay it. It’s going to look better on your report than an unpaid collection. It’s also going to show any lender you try to get credit from that you’re more responsible.
That collection on your report is going to start getting old right away. As the days and the months go by it stops being as relevant. Keep in mind that each year it becomes less important to your FICO score. You won’t be able to do anything else to hurry the process. You can start to build yourself back up.