Collection accounts are a nasty breed. They can wreck your credit scores when you least expect it. I often hear horror stories of clients that had no idea of a collection on their credit and applied for a loan and were turned down, because of a $25.00 collection account.
The reality is that a collection account can drop your scores regardless of the dollar amount. A $25 collection has the same impact to your scores as a $2,500 collection. It’s the derogatory account that is the issue.
So what do you do? I almost always recommend paying your collection accounts for a few reasons:
- When a collection is paid, it will no longer re-age. Re-aging is a process the collection companies do to the account to keep it fresh on your report. The credit scoring software picks up on this re-aging which recognizes the account as new keeping your scores low. But if the account has not been re-aged in months or years, paying the account will update the account and lower your score. Only pay the most recently re-aged collections or new collections.
- Paid collections have a greater potential for deletion through a dispute process to the credit bureaus. It also has the potential to be removed by the collection company. You need to ask for a deletion at time of payment. If they don’t agree, still pay the account then dispute it to the credit bureaus. They most likely won’t answer the dispute and it’s deleted.
- The older the collection account, the less you may have to pay. The collection companies purchase the debt from the original creditor at at discount. They then attempt to collect the full amount, and the difference is their profit. If they’ve not been able to collect on the debt for and extended amount of time, they will settle for a smaller amount from you. I’ve seen clients settle for as little as 10% of what was originally owed. So don’t let the amount owed on the credit report put you off, there’s always room for negotiation.
I hope this helps shed some light on dealing with collection accounts. They are a nasty bunch but the sooner you deal with them, the sooner you can put them behind you and potentially remove them from your credit report.
A hui hou (until next time),