Credit myth buster: Collections

05.21.09
By John Ulzheimer

With more and more credit card debt going delinquent, it's not a surprise that debt collection companies are finding themselves very busy these days. These friendly people are the ones who call your house, your job, your house, your friends, your house, your family, and your house trying to convince you to do what you weren't willing or able to do for your lender, which was to open your checkbook.

In this episode of Credit Myth Busters we’re going to focus on five little-known facts about collections:

1. Re-aging is illegal – don’t let it happen to you! Re-aging is the process (yes, the illegal process) whereby a collector updates the “date assigned” of a collection to fool the credit bureaus into thinking it’s more recent than it actually is. This causes the collection to remain on your credit reports longer than the seven years allowed by the Fair Credit Reporting Act. Some collectors do this intentionally and some do it accidentally. Regardless, you need to make sure that the collection doesn’t stay on your credit files any longer than the listing of the original delinquent account.

2. The collection will not disappear immediately. A collection that has been paid or settled does not get removed from your credit reports right away. Rather, it will reflect as “Paid” instead of “Delinquent”, but it will still drop off seven years after the original delinquent date. There’s talk about a law that will require the removal of medical collections once they’re paid, but that’s not in place as of now. And any other collections for things like unpaid utilities, traffic tickets, and when you stiffed the Domino’s delivery guy for those 9 Meat Lover pizzas stay on your credit reports even after you’ve made good on the debt.

3. Your credit scores will not immediately increase after paying off a collection account. This is probably the most prevalent myth about collections: Many of us make the assumption that paying a collection will lead to an increase in your score. This is not a guarantee, and even if your score does go up, it won’t go up by much. According to the scoring criteria, what’s more important is the fact that you went to collections in the first place, not the balance of the collection itself. If this is the case, then why should you ever pay your collections? Continue to number 4...
 
4. It’s wise to pay or settle or you might be faced with a lawsuit. Many consumer advocates advise that you ignore the collection calls and letters. In fact, I attended a presentation in Atlanta made by an extremely well-known personal finance celebrity, and he told the audience that you should avoid collectors like the plague. I looked at my partner in Creducation, Deanna, and we both simultaneously made the “Oh no, he didn’t” face. In reality, you’re much better off working with the collector to settle the account or pay it off. The more you owe, the more likely the collection companies will pursue the debt into court to compel you to pay. That could mean garnishment of wages or a judgment against you.

5. Payment plan options are limited, and at best they will only get you a little more time. Collectors might be sneaky, but they’re not stupid. If you’re willing to pay them, they’re going to try and get as much out of you as they can in as short a period as they can. Here’s another reason why they don’t like payment plans: Why would they agree to a drawn out payment plan when you couldn’t honor your payment plan with the original creditor? The best you’ll get is two or three months. If you find one willing to offer a longer payment plan, TAKE IT!!

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It's no surprise that the debt collection business is booming.