If you become delinquent, that is, several months late on a payment for anything from a phone bill to a credit card or a medical bill, the original creditor can place your account in “collection” status. At that point, the original creditor will use a debt collector to collect any monies outstanding that they believe you owe.
Most accounts fall into collection status over a dispute between the consumer and the creditor. Often times, consumers feel they already paid, or simply don’t owe the money the creditor is requesting. In other instances, consumers get behind on their monthly payments or get overwhelmed with debt to the point where a collection account is opened by the creditor. Either way, a collection is a major derogatory event and one you should avoid at all costs if you want to maintain a good credit score.
If a collection shows up on your credit report, your credit score will likely drop 20-50 points or more, depending on your overall credit history and depth, and other related factors. At this point you need to make an intelligent decision. Should you pay the collection or dispute it (how to dispute credit report)?
Do You Owe the Debt Being Requested?
This really comes down to whether you owe the debt or not. If you feel you don’t owe the money, you can ask the creditor or debt collector to validate the debt. This is your legal right, and they must come up with original records that prove you owe the debt.
If they can’t provide the proper documentation, you will be able to dispute the claim and the credit bureaus should remove the collection from your credit report. If they are indeed able to provide legitimate documentation, you may want to pay the debt before it becomes a charge-off, a more severe credit derogatory.
What to Expect?
When a collection account is opened, the collection agency will likely contact you immediately. A debt collector may contact you in a variety of different ways, including in-person, phone, e-mail, fax, and mail. Some debt collectors may be working at home via a collection agency, while others may work for an agency or at a call center. Either way, they are restricted to when they can contact you, often only between the hours of 8am and 9pm. They can come to your home, but it’s illegal for them to visit your workplace.
How to Stop Debt Collectors
If you wish to stop receiving contact from a debt collector, you can write a letter to the company asking them to stop. Once the debt collector receives your letter, they aren’t allowed to contact you again unless to inform you that they are taking some type of action against you, or simply to tell you that they acknowledge your request and will cease contact.
Collection agencies cannot collect an amount greater than your actual debt unless your state law permits it. They also may not use profane language, threaten you violently, or state that you will be arrested if you don’t pay your debts. Many collection agencies use scare tactics like these and many other unscrupulous methods to get consumers to pay up, but these companies and their employees break the law in doing so.
Work with the Original Creditor
The best way to handle a collection dispute is to contact the original creditor and work out a deal immediately. If possible, try to set up an agreement whereby you’ll pay the amount due if they change the status of the account to “paid as agreed.” And make sure you get this agreement in writing!
If they don’t agree to such an offer, and you know you owe the debt, you may want to pay it to avoid escalating the situation. If you know you don’t owe the debt, you can write a letter to the credit bureaus disputing the debt, at which point the original creditor has to respond within 30 days or the collection account will be completely removed from your credit history.
If you have an old collection that is still unpaid and showing up on your credit report, you may want to hold off on paying it if you are applying for a home loan or a car lease. While paying it off is likely the right thing to do, it may lower your credit score in the short-term because it will change the last-active date to the latest month, and the “freshness” of the collection may hurt your score. However, over time, payment will reduce the effect of the collection on your credit score and help you avoid getting into a charge-off situation.
Do keep in mind that lenders and other financiers can still deny you credit if you have unpaid collections, even if your credit score is considered “good”, or higher than average. They may view unpaid debts in the past as an indication of future mishandling of credit.
Note that collections stay on your credit report for seven years from the date of the initial late payment that led to the collection.