There is not much that hurts your finances more than having collectors calling and collection accounts on your credit report. However, chasing those accounts may not be the best use of your time. Sometimes it is better to focus on your future rather than trying to repair the past. For instance, have you ever thought, “If only, I had...” or “I wish things would have worked out differently.” The reality is that it is too late to change anything in the past. You may be able to mitigate some past errors, but at what cost?
Collection accounts are past mistakes. They are medical bills, an old credit card, an old cell phone bill or the like. They did not get paid and now they are on your credit report. These accounts often hinder our ability to buy a home or open a new line of credit. They may make it more expensive (or impossible) to rent a house or an apartment.
So, what do we do about them? Before we go any farther, we need to establish some facts. First, collection accounts can remain on a credit report for 7 ½ years from when the account went past due. That means if the account went past due in January of 2012, it will be removed from the credit report in June of 2019, whether it is paid or not. There is nothing you can do to make this account remain on the credit report less than 7 ½ years.
The second point is that there is a different time line for how long a creditor can sue you over a debt. That period of time varies from state to state. Agreements and contracts under Washington law are typically enforceable for six years. In California, that period drops to four years. However, there are actions you can take to restart how long a creditor can sue you. These include making partial payments and in limited cases, acknowledging that you owe the debt and making a promise to pay.
If you are sued over a debt, the creditor or collector may be awarded a judgement in court. If this happens, your wages can be garnished (taken out of your pay) or funds in your bank account may be seized.
The point of this article is that we often focus on paying off old debt when it may be better to focus on improving our credit by adding positive information. When you pay an old collection account, it refreshes the impact that account has on your credit report and credit score. When you talk about FICO credit scores, the most widely used scoring models, they consider the actions you have taken over the last 24 months as the most impact on your score.
If you have a collection account on your credit report from five years ago, paying it now may actually lower your score. If you are thinking about buying an automobile or a home, that drop in points may move your score out of purchase range. Alternatively, it may leave you repaying a new debt with a higher interest rate. It may be best to talk to a lender before you pay the collection account. They can tell you the best way to handle negative entries.
The key to rebuilding credit is making all of your current payments on time. Even if you have no credit accounts, the longer you go without a negative account being added to your credit report, the better it is for your credit. We often encourage clients to look for a secured credit card in order to start reestablishing credit. There is no need to carry a balance on the card; just pay a bill you already have with that credit card and pay the credit card off each month with the money you typically allocate to that expense. If you have any other loans on your credit report, be sure to stay current or get current. Every “on time” payment is a step towards improving your credit.
We all have a limited amount of money with which to work. The key is to know where it will do the best for our finances. Do we put it toward past debts that are almost out of time or do we focus on making sure our current bills and credit accounts are always paid on time? Paying our current bills on time will have the most impact on our credit scores. This isn’t to say we should not pay our debts – instead we are suggesting that we make informed decisions about how we allocate our money.
There are many ins and outs to managing collection accounts that are not discussed here. Contact a certified credit counselor to learn more and get advice for your specific situation.