Collection and/or Chargeoff Account Problems?


Myth: It’s best to just pay them and move on.

Fact: It’s much better to negotiate a settlement where the creditor agrees to remove the negative item from your credit file with the credit reporting agencies. The term is settle for deletion.

Why is this a myth? When you simply pay a derogatory item, you update your credit with new bad information.  So the result of simply paying the collection or chargeoff account is that you reduce your scores. Let me be very clear: if you take a short cut and just pay the negative item, you will do more harm to your credit score than doing nothing. What this does is update aging negative information and this new date gives you the negative hit all over again.

This reduction results in very harshly reduced FICO Scores. Test this yourself with the FICO score calculator I first posted on May 24, 2010. (Again, mind the cautionary notice posted in the same blog).

Surprisingly, negotiating this agreement with the creditor is often easier than you may think. 1) They want your money. 2) You want them to send you a letter.  A negotiation is quite possible. This is something you need to do on your own.

Should you expect the collection agency/creditor will actually remove this derogatory item from your credit report(s)? No.  All you want is their letter on their letterhead saying the collection agency agrees to remove the negative item from your credit report on receipt of your payment of X dollars.

You must obtain a letter on the collection agency’s letterhead along with proof you have paid as agreed.  You need to make the payment with a handwritten check (not a money order or cashiers/bank check). Now, get a copy of the front and back copy of the executed payment and contact the credit agency that is reporting the negative item and request this item be corrected on your credit report.

A much faster and more certain way to get this corrected on your credit report is to talk with your mortgage banker to employ a rapid rescore system on your behalf. This will typically be corrected and most cases, your FICO score increased within 72 hours.

Image Credit: Google Images

 Financially SpeakingJames Spray CCMB, CNE, FICO Pro | CO LMO 100008715 / NMLS 257365 | August 22, 2010 
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

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