Once a creditor turns your bill over to a collection agency, your credit score takes a big hit. Your debt will appear twice on your credit report, once as the charged-off account with your original creditor and then as an account with the collection agency. If you owe the debt, and want to save your credit, try working with the collection agency to settle or pay the debt as quickly as possible.
Collection Agencies
Collection agencies specialize in collecting debts from consumers and businesses. Some collection agencies work on behalf of the creditor who still owns your debt: The collection agency takes a percentage of any money collected from you. Alternatively, your original creditor may sell your debt to a debt buyer. Debt buyers pay the creditor a small percentage of the debt's value and get to keep anything that you pay on the debt. In both types of collection agencies, the employees who call you about your debt (also known as debt collectors) work on commission. This puts you at an advantage for negotiating your debt, as the collectors make money when you pay them something, even if it is less than what you actually owe.
Credit Reports
Your credit report is a history of your financial behavior. Creditors and collection agencies can report the age of your debt, how much you owe, and your history of paying your debts on time. Credit scoring companies use your credit reports to calculate your credit score, a three-digit number that many creditors use to make credit decisions. Employers, landlords and insurance companies also use credit reports and scores when making decisions about offering you a job, housing or insurance coverage.
Paying Your Debt
If you know that you owe a debt, it's a good idea to get it paid off. Not only is it the right thing to do, but it can this improve your credit score, and help prevent future problems with collectors of time-barred debt. Time-barred debt, also known as "zombie debt," is old debt that is no longer collectible under the statute of limitations. Sometimes it gets sold to unscrupulous debt buyers who try to collect it anyway. Some of these debt buyers will go so far as to sue you or place negative information on your credit report, despite the fact that it is no longer legal to do so. While you can defend yourself against such a lawsuit and get that information off your credit report, it's a hassle you simply don't need. On the other hand, if you are unsure that you owe the debt, the federal Fair Debt Collection Practices Act gives you the right to request validation from the collection agency within 30 days after it first contacts you. Send them a letter via certified mail asking for proof that you actually owe the debt.
Negotiation
The preferred method for communicating with collection agencies is in writing: You want documentation of any agreements you make with a bill collector. If you choose to negotiate over the phone, insist that the bill collector fax or mail you a copy of your agreement in writing before you send any money. If you have cash on hand, ask the collector if it will consider settling your bill for less than you actually owe. It's a good strategy to offer a little less than what you can afford so you have some room to bargain. If you have the ability to pay the debt in full, or a high percentage of the debt, work into your negotiations a promise in the collection agency to remove your account from your credit report. If you can't settle the debt, ask about a payment plan.
Follow Up
After you settle your account or begin making payments on your payment plan, check your credit reports. You want to make sure that the collection agency is properly reporting your account. For example, federal credit reporting law requires the collection agency to update your balance as you make payments on an account. If the information on your credit report is wrong, file a dispute with the credit bureau.
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