What do you know about collections? I get a lot of questions like: How long can they stay on my credit report? What effect do they have on my credit score? What’s the best way for me to pay them off and get them out of my life?
Do you wonder about these things? A lot of folks do. Every day I get questions from our members about collections and how they affect their credit. Let’s see if I can give you some answers!
A collection takes place after we have been delinquent on a payment. That payment can be on a utility, a loan or a payment for other services where you may be billed later like a carpet cleaning. Technically, you can be late up to 89 days on your utilities like your water bill, heating bill, or even your phone or cellphone bill, even that invoice from the carpet cleaner. So long as you pay it by the 89th day, no one at the credit bureau needs to know about it. Sure, the water company might charge a late fee or the cellphone provider might temporarily cancel your internet service, but it will not appear on your credit report and cost you a reduction in your credit or “FICO” score.
But, if you allow that bill to go unpaid that additional day so that is it 90 days late, your credit score will suffer. As a general rule, most businesses turn unpaid debt that is 90 days old to their internal collection departments or they may sell unpaid debt to a collection agency for further collection. What that means to you is a severe beating of your credit score. If you had an excellent score, it is now just okay. If you had a good score, your score has dropped significantly. An unpaid collection on your credit has the same power on your score the first day as it does seven years later when it expires and drops off your report! Unpaid collections drag your score down and prevent you from accessing future credit on good terms and rates.
My debt went 90 days delinquent and now a guy named Ralph is calling me from the collection agency. What can I do to stop this? You have a right to privacy and can write them a letter requesting they stop calling you. That’s the law and it works! Write the letter telling them to stop calling you and send it certified mail to the collection agency. Then, they can only call you to tell you they will stop calling or if they decide to take further legal action. Otherwise, all phone contact stops. Remember to keep a copy of your letter!
However, the best recommendation is to pay it and get it out of your life. This sort of debt is not your friend. Once you pay a collection, it changes from an upaid, also known as an open collection, to a paid or closed collection. Immediately upon paying it, your credit score will bump up a bit. As time goes by and the debt is 24 months, 36 months, and further into your past, you will see your score improve. With the collection’s status changing from an open/unpaid collection to a closed/paid collection on your credit report; it will still be a negative item, but much, much less than a collection that is unpaid. It will remain on your report for the balance of the seven years after you have paid it; i.e. if you pay it after two years, it will show as a paid collection for the five remaining years.
With older collections some agencies may be inclined to provide you a fairly steep discount to pay them. Collection agencies buy your debt at a discount. You just have to ask for a lower pay off amount and start negotiating with the representative. If you decide on an amount, get it in writing and attach your check to it when you pay it. Then you have a contract with the agency. Do not send any money until you get your agreement in writing.
Also, good debt offsets bad debt. This means that if you have other credit obligations besides that one debt that went bad, each time you make a payment on them you will improve your credit position. On time payments and keeping your debt balances low and under control are the keys to improving your credit score.
Questions? Ask the Your Credit Union Guy, Greg Meyer at firstname.lastname@example.org
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Our next Credit Myths Financial Workshop will take place this Wednesday Sept. 25th at our Main Office at 6:30pm. If you wish to join us, please contact me at email@example.com or 408-365-6328 to reserve a spot. Don't be shy. We have space!
Our October Workshops will be held at our Sunnyvale Financial Center on El Camino @ Fair Oaks in Sunnyvale.
Auto Financing 101
October 16th - 6:30pm to 7:30pm
Learn how to plan for, research, and negotiate your deal and financing for your next car. Be a step ahead of the car dealer. Take this class!
October 23rd - 6:30pm to 7:30pm
What are the top ten myths of credit? We will tell you and reveal the truth behind these myths.
Both will be held at our office at 563 E. El Camino Real, Sunnyvale CA
Please RSVP with me at firstname.lastname@example.org or 408-365-6328 to reserve your spot.