Going from Bad to Worse – Collections are a Curse!

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 89^th 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 gmeyer@meriwest.com

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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 gmeyer@meriwest.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! 

Credit Myths

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 gmeyer@meriwest.com or 408-365-6328 to reserve your spot.

Is Cash still King?

Cash is King. Or so I have been told over the years. But I have also found that cash is easily lost, burned, stolen, and can also be easily spent on impulse purchases. So, what if we completely dropped using traditional financial institutions and started paying for everything in cash? That means foregoing all checking accounts, debit cards, and credit.

The bank checking account that is free today may cost a consumer $5 to $25 per month next year if they lack direct deposit of their payroll or do not maintain a minimum savings balance. So the cash only question is a reasonable experiment; what is the process of not using a checking account or credit and going cash only for all transactions?

Sure there are some monetary advantages to using cash; you often get a discount on gasoline purchases. Some small markets and liquor stores will charge a dollar or more for using a debit card at their establishment. Using cash, one can forgo these fees. Technically, everyone accepts cash without question.

Where do we keep our cash? In a financial institution? The consumer might use only a savings account to maintain their cash and access what they need from an ATM.  They may keep a personal safe in their home. Of course, keeping cash in your home may open you up as a target for robbery.

To go “cash only,” a person will need to plan ahead and maintain a solid budget. They have to know how much they will need from day to day to cover the costs of groceries, gasoline, and whatever other sundry items they will need to purchase. I know people who currently don’t have a checking account who cash their paychecks and carry that cash with them all month long. Very few of them have any savings to speak of. Thus, the budget is critical to managing our spending cash.

There are a lot of things we won’t be able to do without a debit card or a credit card. How about renting a car? No debit or credit card, no rental car! You cannot make an online purchase with cash. You cannot reserve a room or an airline reservation over the phone or internet with cash.

Paying bills by cash creates a dilemma of time. A person would have to have all their vendors to whom they pay their bills local to their home or employment. You don’t want to mail cash! You would want to go to the bank that holds your home loan and make your payment there. Then you would have to go to a location to pay your power and gas bill, your phone bill, and your cable TV bill, etc. Do we have the personal time to run around and pay all of our bills this way? Gasoline is not getting any cheaper so running around like this is going to cost us.

I could not pay all my bills with cash and believe anyone with a few outstanding accounts would be challenged to go “cash only.”  In the situation that I have described thus far, a debit card with online banking makes the most sense.

Debit cards draw cash from your checking and, thru the merchant banking system, when we make a purchase the funds are transferred from our checking account to the merchant’s account. If a debit card is lost, it is easily replaced by the financial institution. If the consumer reports their loss immediately, they will suffer no monetary losses. If someone steals your debit card and they process transactions on it, the consumer is reimbursed by their bank for the fraudulent transactions. Not so for cash.

I don’t want to run around saying the “King is Dead!” but, it appears that there are a number of things we can do with cash in our pockets, but it seems there is more we cannot do without a debit card and only cash in our pockets. So, is going “cash only” a viable option in today’s world? Probably not.

And don’t forget our financial education workshops that we are offering here at our main office in the coming month of June:

Free Financial Education Class: Real World Budgeting for Teens (seems to be a lot of demand for this!)
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

Pay a Collection Fast and Put it in your Past!

  If collection agencies can buy my debt at a discount, can I pay it at a discount? Yes, often you can pay it at a discount but it depends on the age of the debt being collected. New collections are not typically discounted as they are being collected by internal collection departments or a business is using a collection agency as a vendor to collect for them. The collection is discounted when that debt ages and gets sold to an outside agency for collection.

 Contact the collection agency and test the waters of negotiation with them. Depending on how old your debt is, they may be willing to give you a significant discount. Often debt that is two years old or more is purchased from businesses and other collection agencies at 50 cents or less on the dollar. A $500 debt may be settled for half or less.

In your negotiation, make sure they will show your debt as paid or settled for a lesser amount. Either of these is preferable to an open and unpaid collection on your credit. Open collections will be a drag on your credit score for seven years. The “point cost” on your score will remain basically the same from day one to the last day of the seven years. Paying the collection changes the debt from open/unpaid to closed/paid. Paying an open collection has an immediate positive affect on your credit score. It will bump up right away and as it gets further and further in your past your score will improve with each passing year provided you don’t incur any further bad debt.

If you agree to an amount and how your collection will be listed on your credit report, the collection agency will want payment NOW and you should be prepared to cut them a check within a day or two. But, before you write the check, GET IT IN WRITING FROM THE AGENCY! Get the mutual agreement the collection agency made faxed to you, emailed to you, or snail mailed to you. Make a copy of the agreement and file the original. Attach your check to the agreement copy and you now have a contract with the collection agency.

Word to the wise: Never send a collection agency a check before you get your agreement in writing. A member of Meriwest Credit Union was in one of my workshops not long ago and complained about a major U.S. financial company. It is the sort of company that everyone believes is one of the most honest and forthright businesses in our nation. He received a call from them for a debt of $2,400 he had built up on his card. These had been business related expenses but the business had gone under in the recession and he was not going to be reimbursed for them. The financial company called him and said that if he paid $1,200 they would show his debt as paid. He mailed the check. The next month, they called him and asked when he would mail the other half of what he owed. He said the guy last month said his debt would show as paid. The fellow at the collection department asked, “Did you get that in writing?” Always get it in writing!

Free Financial Education Class: Real World Budgeting for Teens
Wednesday, June 13, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 

Free Financial Education Class: Auto Financing 101
Wednesday, June 20, 2012 - 6:30-7:30 p.m.
Chesbro Financial Center, San Jose, CA

 

 

 

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