Debt in collections: Do you settle or pay in full?
By - - | Published: July 19, 2010
The Credit Guy
Dear Credit Guy,
I was making payments at the agreed upon amount on my bank card. Then something happened and they screwed up. Long story short, my debt ended up with a collection agency. Should I fight for it to be back with the original creditor and pay it off, or should I settle with the collection agency, which is a third party? Also, do I pay the amount in full or should I negotiate for a lower amount? My problem is that now the bank has reported it to the credit bureau, and I am not sure what it will say on the report. And how long does it take to be removed from my credit? -- Syed
In my experience, once a creditor has moved an account into collections, they very rarely allow the account to be moved back. However, it sounds as if your creditor may have contributed in some way to the fact that your account is in collection. If so, yours may be a case where the creditor would be willing to move the account. It never hurts to ask. When you call, I would request to speak to a supervisor, as the representative answering the phone is unlikely to have the authority to make that type of change.
If you are successful in getting the account moved back to the original creditor, I would request that the account be re-aged. What that means is once you make on time payments for several months and have no amounts past due, the creditor would bring the account current and remove all the late payment and collection activity from your credit report. Re-aging the account will improve your credit score tremendously.
On the other hand, if you are unsuccessful and the original creditor will not communicate with you about the account, then you will have no other choice than to deal with the collector. Your question regarding whether you should try to settle for a lesser amount than is owed is a personal decision. Were you to base the decision on how it will affect your credit, it would be better for you to pay the full amount due. Although your credit score will not improve with a full payment on a collection account, potential creditors do not like to see settled accounts. A settled account on your credit report could mean that you would pay more for credit in the near future should you need it.
I recommend that you check your credit reports each year for free at annualcreditreport.com and review them for accuracy. Any items that you believe are inaccurate should be disputed with the bureau that reported it. Your credit card account and any collection account associated with the account will remain on your credit report for seven years from the first date of delinquency (typically 180 days late).
Keep in mind that most people have a nick or two on their credit from time to time. This particular negative hit to your credit will have less effect over time and will have little impact after two years or so of positive information (always on-time payments, decreasing revolving credit balances, etc.) added to your credit report.
Take care of your credit!
See related: Know your rights: Fair Debt Collection Practices Act, The ugly side of debt collection, Survey: Debt collection calls growing more frequent, aggressive, How to dispute credit report errors
Meet CreditCards.com's reader Q&A expertsDoes a personal finance problem have you worried? Monday through Saturday, CreditCards.com's Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.
- Q&A: Should I close high-limit, zero-balance cards I don't use? – If you have several credit cards with high limits and no balance, which you hardly use, you might consider closing one of them, especially if it has an annual fee. Just make sure to keep your oldest cards open ...
- Q&A: What to do if merchant details on card statement are unfamiliar – Finding charges inaccurately reported on credit card statements can be annoying, but disputing them can be cumbersome. Keeping receipts and tracking expenses can help you figure out legitimate expenses without having to initiate a chargeback ...
- Q&A: Can I transfer my own credit card to my partner's name? – Have an authorized user who charges on your card more than you do? While you can't transfer the card to his name, you still have options, such as transferring any debt he may owe to a new or existing card in his name ...