Avoid the fear they invoke.
Why Is This Important?
- Collections accounts, also called derogatory items, can be scary — a basic understanding of the process removes that fear.
- With most collections accounts, you have already paid the credit score penalty when the account was charged off or became 30/60/90 days late by the original company.
- Each collection is a 20-point penalty — half of the penalty goes away after 1 year, all of it goes away after 2 years.
- The penalty for a collection is the same 20 points whether it's $50, $500 or $5,000.
The Dirty Little Secret
- Collection companies buy old debts from companies you had an account with that was closed with an outstanding balance.
- Collection companies buy these accounts for pennies on the dollar — e.g. a $500 debt bought for $15.
- Even if the collection company only gets $50 out of you, they make over 300% profit on their investment; if you pay $100 they make 660%, if you pay $500 they make 3,300%.
- The money you pay the collection company stays with the collection company — the original company gets none of it, since they already wrote off the account for a tax credit.
What Actions Should You Take?
- DO NOT CLICK THE DISPUTE BUTTON — for any collection over 1 year old, the dispute button is like poking a sleeping bear; nothing good will happen.
- Ignore the collection company — do not speak with them, block their calls, do not respond to email, SMS or US mail.
- Collection companies are known to break the law and keep refreshing dates on collection accounts, which resets the clock and brings another 20-point penalty.
- If the collection was paid or isn't your account, contact Haseeb Law — they don't charge a fee and may even get you a payment for their breaking the law.
When Should You Pay?
- If the collection is recent (within the last 6 months), you could regain the 20 points from the penalty.
- If the amount is less than $200, ask yourself if it's worth 20 points.
- Ask yourself if the timing of the points will make a big difference if you're about to buy a home or car — that would be a good reason to spend the $200.
- Having a collection on your credit report will NOT prevent you from buying a home or car!