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How To: Deal with Collectors and Pay Off Old Debt, Final Part Three

 (I am certainly not an expert in this field, nor do I have formal training or education, I am merely sharing my knowledge I've come to know in my personal experience. I would suggest doing more research and talking to a financial professional before figuring out a debt management plan.)
One thing you need to know is that once a collection or charge off is on your credit report, the damage is done. Paying it off is not a guarantee that it will be removed from your report, nor will it increase your score very much. Paying or settling it will, however, keep further collection from occurring. Your phone will stop ringing, your mailbox will start looking a little thinner, and you will have peace of mind knowing that you will never have to pay that debt again. While the bad mark of having a collection on your credit might not go away, your debt amount will. The less debt you owe (compared to your income), the higher your score.
Besides the peace of mind knowing your debt is paid, the other goal from paying off debt would be at least to try and get the collection agency to remove the item from your credit altogether. This is not always easy and collectors do not have to do this, even if you ask, but it’s always good to at least try. If it’s a small debt that you can comfortably afford to pay, I would suggest writing a letter (not speaking them over the phone) and offering to pay the entire debt off in exchange for removing the item from your credit report. This is the BEST option, as once it’s removed, it can substantially improve your credit score. If they go for it, great! Make sure they send you proof of the agreement and a receipt after you pay, and follow up by checking your credit score within the next 30 days to ensure it was actually removed.
If they say no, you have a couple of ways of dealing with it. Remember, once the collection is on your credit, and they aren’t willing to remove it, paying it off will only improve your score slightly, very slightly, if at all. So, you have to ask yourself whether you want to pay full price on a debt when it doesn’t really help you too much to do so. However, if you are trying to settle lots of debts, and you could pay two debts by settling with the same money as one debt would cost you to pay it off, it might be better to counter the collector with an offer to settle the account for less than you owe. As a rule of thumb, you would offer 50%. So, on a $200 debt, you could offer $100 to “settle” the account. I guess you could really offer whatever amount you wanted to, but they do not have to accept any amount you offer that is less than the original amount owed if they do not want to. Most of the time, if the debt is not with the original creditor, and it’s an older debt (2 years or more) they will be more willing to settle. They are no longer allowed to report the bad debt on your credit report after 7 years, so the older it is, the more willing they would probably be to take anything you have to offer them. Just make sure you get it in writing that the settlement offer is an agreement that as soon as money changes hands, they will no longer attempt to collect the debt and will report on your credit report as “settled.”
In my case, one of the reasons we are cleaning up our debt is to purchase a home. In order to buy a home, the new rule is that any and all collections and outstanding debt of over $1,000 must be paid. Therefore, anything over $1,000 must at least be settled before you can qualify for a home. These days, getting a home requires a lot more hoop-jumping than in previous years. In 2004, I could have had $50,000 in debt, no savings or down payment and been breathing and been approved for a $300,000 house. Those days are no more!
One thing to keep in mind with your credit report is that the most important indicator of your credit is time. Your credit score will usually be indicative of your activity within the last 6 months to a year. Late payments within the last 6 months will drop your score way down, but as time passes, that late payment will matter less and less. The same holds true for old debt. The older it is, the less weight it holds with your credit score. Therefore, a 6 year old debt for a very little amount of money is probably not causing too many problems with your score. However, when you contact the creditor and pay that debt, the clock starts over, causing your score to drop initially, because the activity on that account is new. So when paying off old debt, it might be more damaging to pay off that $100 collection account than just to keep it on your credit and let it fall off within a year. All debt will be removed from your credit after 7 years of inactivity. Every time you start communication with your creditors, the clock starts over, so just keep that in mind.
If you own a home and a car, and are not planning on purchasing anything large within the next few years, paying off old debt is not something that’s probably on your mind, however, your motivation for paying off debt and cleaning up your credit could come from anywhere. For me, our motivation is to purchase a home and live life without the ever-present feeling of owing someone else money. It is also important to us that we are finally free to be able to do things with our money that we actually want to do, like take a vacation without guilt that our money should have gone to something else, like our debt. If you are in a situation where you feel it’s time to start paying off old debt, make sure you speak with a financial professional you trust that can advise you on the best way to begin your debt repayment plan.
And remember, you can do it! It is possible to be free of debt, if you are willing to work hard and sacrifice for a little while to do so!


This is a great series. Thank you for posting it!

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