How to Fix Your Credit Mistakes
It all started back in 2011 when I had my first apartment in college. Upon signing a lease, I was told that my security deposit would go towards my last month’s rent. However, upon moving out, the landlord informed me that we (my roommates mostly) had trashed the apartment so much that our security deposits needed to go toward cleaning and repairs. Therefore, he expected each of us to pay the last month of rent which was another $500! I don’t know about you, but in college $500 was a lot of money, especially when you had other plans for it (Summer trip). So being cheap and full of pride, I told him I wasn’t paying because he should’ve been clearer about that when we moved in. MISTAKE! You see a lease is a binding contract, this means I legally owed him money and if not paid, he can report it to the Credit Bureaus. And that’s precisely what he did. This debt collection of $481 crippled my credit score and has cost me over $10,000 in interest over time! To ensure that you don’t make this same mistake, I am giving you the guide on how to properly get collections of your credit report and save you thousands in future interest.
WHAT IS A DEBT COLLECTION
Let’s first understand what a debt collection item is. A debt collection is a severely past due account that the original lender has sold to a collection agency, hence the name “debt collection.” It's one of the worst types of entries you can have on your credit report. This is especially true for more recent collections. It’s important to know that negative credit items like late payments and credit collection fall off your report after 7 years, this is known as the “statute of limitations.” You can improve your credit score by waiting the seven years or getting these collection accounts deleted from your report or at least having them reported as “Paid” or “Current” prior to the 7- year waiting period.
Before you pay off a collection account, you should first negotiate with the debt collector to have your credit report updated to something favorable. Creditors are NOT required to remove your collection items just because you paid the outstanding balance. The only unacceptable scenario is to pay the collection without having the fact reflected in your credit report. Below is a guide on how to pay off your collection items to get the most favorable results. These methods are listed from best case to worst case (but still a good option) scenarios:
1) GET REMOVED WITH SETTLEMENT
Negotiate with the debt collector to have the account deleted from your credit report in exchange for a payment less than the full amount. Send a written request (pay for delete letter) to the collector offering a settlement payment if the collector deletes the account from your credit reports. A settlement payment is an amount that's some percentage less than the total amount due. The more you're willing to pay, the more likely it is that the debt collector will work with you. Wait for a written response from the collector before taking any action. If you prefer, you can contact the collector by phone to negotiate pay for delete. Even if you choose to negotiate by phone, you still need to have the agreement in writing.
Have the collector mail or fax you a letter including the terms of the agreement before making a payment. Here's a Sample Pay for Delete Letter
2) GET REMOVED WITH FULL PAYMENT
Most collectors want payment in full and will not delete the account from your credit report for a settlement payment. When this is the case, offer to pay the account in full in exchange for the collector deleting the account from your credit report. Again, send your request in writing and wait until the collector responds in writing before making a payment.
3) SETTLED AND REPORTED AS PAID IN FULL
Ideally, you want the entry completely removed from your credit report. Unfortunately, not all collectors are willing to do this even in exchange for payment. If you cannot have the entry completely removed, you should have it updated as “Paid in full.” Offer the collector a settlement payment some % less than the full amount owed. Get the collector to agree to update the account as “Paid in full.” The agreement should be in writing.
4) SETTLED AND REPORTED AS SETTLED
Whether you pay in full or pay a portion getting the debt changed to “settled” is still okay. Keep in mind that a settled entry on your credit report will not boost your credit score as much as “Paid in full.” If you want your account to state “Paid in full” but cannot get the collector to do so for partial payment, then pay the account in full.
After you pay the collection, file away your proof of payment. Monitor your credit report to make sure the collector updates the account as paid. If the collector does not update the account, dispute with the credit bureau, providing proof of payment if necessary. In conclusion, its best to avoid debt collections altogether, but if you already have some use this guide to get them removed as quickly as possible.