Tips for Paying Off Debt Collections
When a debt has gone long past its due date, chances are that it ends up in the hands of a collections agency (like Eastpoint Recovery Group). If this happens, your credit score will be impacted, collections will contact you, wages could be garnished, and you may continue to incur interest until the debt is cleared.
If you do find yourself in this situation, we have compiled a few tips to help you best handle debt collectors and the debt in general.
What Is a Debt Collection Account?
A debt collection account is not the same as a regular debt. When a debt goes into collections it means that the payments are way past overdue and the lender finds it more effective to hand off the debt to a debt collection company.
Debt collection companies are third parties and there are two ways they might become involved. The first is when they are hired by a lender to retrieve the owed amount. Certain creditors might find it more cost-effective and efficient in time to have a third party handle the matter.
The other way a debt collector may get involved is if the original lender sells the debt to the debt collection company. This means that the original lender is no longer involved in the matter and the debtor must now pay the debt collector.
When a debt is handed over to a debt collector depends on the agreements made with between the original lender and the debtor. This will vary between different companies and institutions. For example, your credit card debt might go to collections much sooner than your student loan debt.
It is good to know that the creditor does not have to inform you that the debt account is being sent to collections. If you do not pay attention to the original terms of the loan and don’t check what the time limits on the debt, then you might not find out until the debt collector contacts you.
How a Collections Account Affects Your Credit Score
Going into collections is never good for your credit score. The extent to which your score drops depends on the amount you owe, and how high your credit score is when the collections agency reports the debt. For example, if you are delinquent on a payment less than $100, your credit score may suffer minimal impact. Conversely, if you have a $10,000 debt, your score will take a significant hit.
A low credit score will make it extremely difficult (if not impossible) to open additional lines of credit or get loans, especially if the debt is still outstanding on your account.
How to Clear Debt Collections
There are 3 payment options once a debt is in collections:
Option 1: Paying the owed amount in full in one single payment. Also called a lump sum payment.
Option 2: Agreeing on a payment plan of several installments.
Option 3: Settling the debt for a smaller amount.
Tips for Lump Sum Payment
Full payment in a single installment is the fastest way to clear the debt. This is also the fastest way to improve your credit score again.
However, be sure to receive confirmation that the collections agency will update your credit score after payment. To do this, send a formal letter to the debt collector stating that you will pay the amount in full in a single payment in return for an accurate credit update.
Wait for written confirmation from the debt collector and then make the payment. Also, make sure to keep a copy of proof of payment. This is for future reference, preventing other debt collectors from contacting you over a debt that is already settled.
Tips for Payment Plans
If you are unable to pay the full amount with one payment, you can negotiate a payment plan that is more manageable. In other words, you can pay off the debt in several installments.
Before suggesting a payment plan to the debt collector, consider how much you can realistically put towards the delinquent debt every month. Don’t forget to also calculate in any interest or other fees the debt collector may charge. It is important that this payment plan is realistic because an overly ambitious plan would create new debt problems and might end the agreement.
Send a formal letter to the debt collector’s office with the payment plan suggestion, clearly stating how much you are able to contribute each month. The debt collector will then send back a more detailed document complete with all the terms and agreements of the payment plan. Once this has been acknowledged by both parties the agreed upon time period starts.
Again, ask the debt collector to update your credit status. Depending on your agreement this may occur during the payment period or after the debt has been fully settled.
Tips for a Settlement
When repaying the debt in full is unrealistic, the debt collector may be willing to settle for a smaller amount. However, finding a settlement that both parties will be satisfied with is usually a lengthy process. It might also be a costly one when attorneys are involved with the negotiations.
When trying for a settlement, be very mindful of the details. Know that a partial payment is not necessarily removed from your credit report. Depending on the final agreement with the debt collector it could remain on your credit report for another 7 years.
Another important element to know is that a partial payment may allow the collector to sell the remaining debt to another debt collection company. This only keeps you in the same debt cycle. Unless specified in the settlement agreement, the collection company is legally allowed to sell the debt.
Why You Should Clear Collections
Paying off a debt in collections is always the better option for your future. The sooner the debt is settled, the less you will have to pay on additional costs like interest and fees.
Clearing the debt stops the cycle. It prevents debt collectors from selling on the debt to the next collection company, which would put you back in the same situation but with an even poorer credit score.
Delinquent debts are very bad for your credit score and remain in your credit report for 7 years. This means that during those 7 years it is very difficult to get any type of loan, whether it is a mortgage, car loan or a new credit card. Those with a poor credit score are often also given higher interest rates, which ultimately adds extra financial strain and stress to your life.
Regardless of the chosen method, it is always better to deal with the problem instead of trying to ignore it. Ignoring it only prolongs the issue and has you dealing with pressure from the debt collector for longer, too.