Strategies for Handling Collection Accounts

Collections and charge off accounts are the dark hole of credit repair; they have the power to tarnish your credit score for nearly a decade. What’s worse, the responsible act of repaying your debt can actually hurt your score further, simply by reactivating your account. Without proper attention and planning, the effects can be devastating. Depending on your account status, there may be nothing you can do to repair the damage, but minimizing future pitfalls can help improve your credit score. Before giving up and giving in to bad credit, consider the following options.

Negotiate. Even though it is not required, your debt collector may be willing to delete a collection or charge off citation from your credit report in exchange for a full or partial repayment. Write a letter outlining your offer, and avoid using language that implicates liability on your part. Wait for their written response before paying, and make sure that any agreement explicitly states the agreed-upon terms of your repayment. It’s a longshot scenario, but sometimes a little communication goes a long way.

Take what you can get. If the collection agency refuses to budge on citation removal, ask for a simple note on your credit report that confirms the account’s “PAID IN FULL” status in exchange for payment. While it’s not exactly a credit score improvement solution, future lenders — especially mortgage brokers — may look more favorably on a negative account cited as “paid” or “settled.” Again, make sure to get your agreement in writing before making a payment.

Watch and wait. Collections and charge offs can stay on your credit report for up to seven years, but the risk of worsening your credit score by paying them off is a downside to consider. If you are close to the seven year mark, the best credit solution may be to wait for the citation to drop off your credit report, unless there are other legal implications afoot.

Pay the debt. Yes, watching and waiting may prove wise, but avoiding debt isn’t the most ethical course of action. While paying your collection debt may lower your credit score in the short-term, the long-term effects of bad credit can be more severe. On the other hand, paying debt will help you in terms of:

• Documenting on your credit reports your responsible intention to pay your debts
• Decreasing your debt-to-income ratio
• Increasing your chances of future credit opportunities by eliminating past obligations
• Eliminating or minimizing possible legal actions brought by creditors

Collections, charge offs, and bad credit can kill a credit score, but your financial health will improve with the right attitude and smart planning. Assess your personal situation and the options available to you; there is likely more than one way to ensure that past mistakes don’t repeat themselves in the future.