If you're hoping to negotiate a debt settlement, be aware that tactics that were useful a decade ago could backfire now.
This post comes from Christine DiGangi at partner site Credit.com.
Common misconception: Paying off a collections account improves your credit score.
Paid or unpaid, having a collections account on your credit report is a negative. It shows you failed to pay a bill on time, so you’re a higher lending risk than someone who doesn’t have a collections account on his or her report.
It doesn’t matter if you pay the bill eventually. As far as credit scores are concerned, the problem lies in the fact that you didn’t pay it when it came due.
If it’s bad for your credit whether or not the account gets paid, what’s the point in paying it? You want to satisfy the debt and put it behind you, and the creditor or debt collector wants to get paid. It sounds like a perfect situation for negotiation, right?
That’s what one of our readers wondered: “Can I tell a creditor that cashing my check constitutes agreeing to delete [the] account from my credit report?”
Unfortunately, that’s probably not going to work. In fact, it could backfire.
Michael Bovee, the creator of the Consumer Recovery Network and a 20-year veteran of the debt and credit industry, said that sort of negotiating might have worked a long time ago, but debt collectors aren’t going to go for it now.
Collectors rely on data from the credit reporting agencies in order to determine which debts are most collectable, and the credit reporting agencies don’t want collectors to delete accurate information from credit reports, Bovee said.
He said he saw it work like this: The consumer says to the collector, “I want you to take this debt off my credit report when I pay it.” To which the collector says, “I can’t do that, but once you pay it, why don’t you dispute the account to the credit bureau, and then we won’t respond.” By the collector not responding to the dispute, the credit bureau would have to remove the trade line.
About 10 to 15 years ago, Bovee saw consumers regularly succeeding with this tactic, and some online forums still cite this “pay-to-delete” tactic as a way to deal with collections accounts.
“Debt collectors today are not doing it because they don’t want to hurt their relationship with the credit reporting agencies,” Bovee said.
Why bother paying?
Getting back to an earlier point: Why pay at all? Well, it depends on what your credit goals are. Say you want to get a mortgage. The lender will pull your credit reports, see a collections account with a balance and factor that into your overall debt-to-income ratio. They may not want to extend you credit if you already owe someone else a lot of money.
And as far as bringing up the “I’ll pay you if you help me” idea with the collector, you may be hurting your chances of a debt settlement.
“You’ve indicated you want something,” Bovee said. “Now they’ve got leverage.” It’s a debt collector’s job to get you to pay, so if it seems like you’d be willing to pay to get the account to go away, maybe you’d be willing to pay more of what’s owed in order to lower your debt-to-income ratio.
Whenever you’re trying to deal with a collections account, the best thing to do is communicate with the other party. Make sure the debt is legitimate, belongs to you and still qualifies for collection before paying anyone.
If you want to track your progress as you work on rebuilding your credit, you can monitor your credit score with the Credit Report Card, a free tool that updates two of your scores every month.
More on Credit.com:
- 10 Tips for Negotiating With Debt Collectors
- How to Choose a Credit Counselor
- A Complete Guide to Your Debt Collection Rights