If your charged off account has ever traveled into the dark world of collection, then you are familiar with the aggressive calls multiple times a day asking you to “pay up, or else”. What you may not be noticing is the longer lasting, more insidious nature of the collections process – the devastation of your credit score.
Score off a cliff
Let’s assume Jane Doe has a 760 credit score. Let’s also assume she has no charge-offs or collections accounts on her credit report. To make Jane less fictional, let’s assume she has a single late payment made 5 years ago. Now let’s assume Jane slips into a one year coma, and wakes up to find her Chase credit card in collections. It is a safe to suggest that Jane will be able to relearn how to walk and talk again, before she will be able to get a credit card at a decent interest rate. The hit on Jane’s credit would be a catastrophic hit of at least 75 point – and perhaps up to 125 points. Why the drop? The algorithms used to formulate Jane’s credit score aren’t weighted equally. Late payments account for 35 percent of Jane’s credit score and then she’s hit again with the collection account which accounts for another 15 percent of her score. 50 percent of Jane’s credit score is being affected by one charged off account.
All is Not Lost
“We can’t remove anything from your credit report for seven years” or “It’s not our choice what we report to the credit bureaus”. These are just some of the more common lies that collection agencies spew when trying to coerce Jane into paying off her debt. A collector will almost always use the removal of a notation on a credit report as the strongest card in their deck. Collectors know that most people can scrape together a few hundred dollars to pay off a debt; however, they know that very few people can wait seven years to begin rebuilding their credit. How does one combat this? Make removal of the collection account from their credit report a precondition to any settlement negotiations. This position, if laid out firmly and applied consistently throughout negotiations can be the difference in tens of thousands in paid interest over the next seven year.
Though there are many lessons to be learned from Jane’s story, the key takeaway is to never underestimate the importance of bargaining for a pay per delete. No matter how much the collectors say they can’t (they can) or won’t (they will), you must make deletion of a negative trade line a precondition to any discussions with a collection agency.