If your terminated account has ever traveled into the dark world of collections, then you’re familiar with aggressive calls multiple times a day asking you to “pay or else.” What you may not be realizing is the more enduring and insidious nature of the collection process: the devastation to your credit score.
Scoring a cliff
Let’s assume that Jane Doe has a credit score of 760. Let’s also assume that she has no charge-offs or collection accounts on her credit report. To make Jane less fictitious, let’s assume that 5 years ago she made a single late payment. Now suppose Jane falls into a year-long coma and wakes up to find her Chase credit card in collections. It’s safe to suggest that Jane will be able to relearn how to walk and talk before she can get a credit card at a decent interest rate. The impact on Jane’s credit would be a catastrophic impact of at least 75 points, and perhaps as high as 125 points. Why the fall? The algorithms used to formulate Jane’s credit score are not equally weighted. Late payments account for 35 percent of Jane’s credit score, and then they hit her again with the collection account that accounts for another 15 percent of her score. 50 percent of Jane’s credit score is affected by a canceled account.
Not everything is lost
“We can’t remove anything from your credit report for seven years” or “It’s not our choice what we report to the credit bureaus.” These are just some of the most common lies that collection agencies spew when trying to force Jane to pay off her debt. A collector will almost always use the removal of a notation on a credit report as the strongest card in their deck. Collectors know that most people can scrape together a few hundred dollars to pay off a debt; however, they know that very few people can wait seven years to start rebuilding their credit. How do you combat this? Make removing the collection account from your credit report a precondition for any settlement negotiations. This position, if firmly established and consistently applied throughout the negotiations, can make a difference of tens of thousands in interest paid over the next seven years.
While there are many lessons to be learned from Jane’s story, the key takeaway is to never underestimate the importance of negotiating a takedown payout. No matter how much collectors say they can’t (can’t) or won’t (will), you should make removing a negative business line a precondition for any discussion with a collection agency.