Debt Collectors Killing Your Credit?

NEW YORK ( --"I want to clean up my credit. How do I take care of collection accounts?" It's a question we hear often, often from readers like Kim, who wrote on the blog:
I have to admit that I have a few collection accounts... Until a year ago, I just stuck my head in the sand and completely ignored the debt because it seemed too overwhelming to tackle. But now I'm trying to face my fears and eventually reclaim my "good/excellent" credit score standing.

If your credit report lists one or more collection accounts, here's how to tackle them in five steps.

Step 1: Figure Out Who You Owe

This may sound simple enough, but if more than one of your accounts has gone into collections, or if any of those accounts are older, it can get confusing. An account may have changed hands, for example, or you may not have heard from anyone about a debt for a while so you aren't sure where it stands.

"Debts that remain unpaid long enough will get assigned out to many different collection agencies, or sold to a debt buyer who may use outside collection agencies," explains Michael Bovee, founder of the Consumer Recovery Network, which publishes a free guide to debt settlement. "Debts can often be sold multiple times. During these later stages of debt collection you can receive letters and calls from half a dozen or more agencies. This can make it tough to determine who it is you should contact to resolve an old collection account."

He suggests several approaches to tracking down what you owe:
  • Contact the original creditor to find out whether they have placed it with a collection agency. The original creditor is the company to which you first owed the debt; a credit card issuer, cell phone company, a hospital or a bank, for example. If they tell you they have sold it, then ask for the name of the collection agency to whom they sold it. Keep in mind, though, that the agency may have since sold it to yet another collection agency.
  • Check your credit reports to see what collection accounts are listed. Bovee also suggests looking at the inquiries section of your report to see if it lists any inquiries from debt buyers or bill collectors. "Get your annual free credit report from all three credit bureaus. They may not all be the same," warns Mark Neeb, president and CEO of debt collection agency The Affiliated Group, and past president of ACA International. "There may be collection items that appear on one (report) but not on another." Your credit report should list contact information for each company that is reporting information. If it doesn't, and you can't figure out how to contact the collector, ask the credit reporting agency to provide it. (You can download your three main credit reports once a year for free at
  • Check your mail for collection notices. Keep copies of any letters you receive while you sort out how much and whom you owe. If you receive a collection letter about a debt you don't recognize, or aren't sure the amount is correct, write to the agency immediately and dispute the debt. Under federal law you have the right to request validation of the debt.

If you are dealing with more than one account, it's a good idea to make a list of all the collection accounts you have identified through this process: the name of the agency, the original creditor, the current balance, and the date you defaulted with the original creditor.

If you decide to call a bill collector, grab a pen and paper first. "Take detailed notes," says credit coach and Contributor Jeanne Kelly. "You want to make sure it is an accurate bill. Take people's names, extension, where they are located so you know who you have spoken to when you need to follow up." Keep those notes in a file along with any correspondence, copies of your credit reports, etc. Plan on holding onto this file for a long time, just in case.

If you are hearing from more than one collector for the same account, it can be a challenge to figure out who you should be paying. "It can be a real mess and I feel for consumers who have this issue," says Neeb. Explain to both collection agencies what is going on and ask them to help verify which one is valid. "Any collection agency that is worth its salt will help a consumer even if it's not our fault," he asserts.

Step 2: Decide What to Pay

Collection accounts can be divided into four buckets, Neeb explains:
  • Ones you know you owe, and the amount is correct.
  • Accounts you don't remember and aren't sure you owe.
  • Debts that may have changed hands.
  • Those in which you don't agree with the existence of the debt in the first place.

The first group -- debts you know you owe and the amount is correct -- are "low-hanging fruit," he says. Bovee agrees, adding, "If you are paying off a debt in full, there is not much to it. The collector will be happy to hear from you."

Deciding how to handle the others may be trickier.

If you dig up a debt you don't recognize, request written verification of the debt from the collection agency. The FTC points out, "Every collector must send you a written 'validation notice' telling you how much money you owe within five days after they first contact you. This notice also must include the name of the creditor to whom you owe the money, and how to proceed if you don't think you owe the money."

If they already sent this to you when they first tried to collect the debt, they aren't obligated to send it again, "but every collection agency I know will," Neeb insists.

If there was a legitimate dispute about the debt in the first place (for example, you were billed for a service you canceled per the terms of the contract, or for merchandise you returned), you can notify the collection agency that you don't believe you owe the debt and ask them not to contact you again. If you have proof of why you believe the debt was wrong, you can also ask them to stop reporting it to the credit reporting agencies. Include documentation of your side of the story if you have it.

For older accounts, make sure you understand whether the statute of limitations has expired. If a collector tries to sue you for a debt that is outside this time frame -- usually four to six years, but longer in some cases -- you can raise the statute of limitations as a defense against the lawsuit. Making a payment, even for a small amount, on debt outside the statute of limitations, however, will usually start the clock ticking again. That means you could open yourself up to a lawsuit at a later date.

One of our readers, Melissa, shared her experience with this:
I had a $100 collection account for a medical bill on my credit report that I wanted to pay off. I called the hospital that was listed as the creditor and they said they couldn't find my account. A day, and about six phone calls to various companies, later -- I found my debt. It was with a company called NCO Financial. They informed me that my balance was actually $871, a $100 debt for my minor daughter (that I was aware of) and a $771 for myself that I had forgotten about and is NOT listed on my credit report. I paid the $100 and told them the $771 from date-of-service 2005 was past the statute of limitations and that I would not be paying it.

Step 3: Pay What You Can

Your next step is to set a budget for resolving these accounts. This means taking a careful look at your income and expenses to figure out how much you can afford to pay. The best deals will be struck when you have saved up cash to settle. If all you can afford is a very small payment on a very large debt, then you may be better off talking with a bankruptcy attorney. "If you are not in a position to follow through with any arrangement, wait until you are better prepared financially to strike a deal," Bovee advises.

Once you know your budget, you can start contacting collectors to try to settle. "When you are prepared financially to resolve older collection debts, it is often best to make contact with collectors by telephone," Bovee warns. "Letter writing campaigns to collection agencies are not all that effective."

We often hear the question, "How much should I offer?" The answer is to try to pay what you can afford. But it doesn't hurt to start your negotiations lower than that so you have room to haggle. "Getting collectors to settle a debt for 'pennies on the dollar' is not that common," says Bovee. "But a few 'dimes on the dollar' is. The approach you take, and the amount you need to be prepared to pay, will vary from one account, or one collector to the next."

Step 4: Make Payments Carefully

Whether you are paying the balance in full or negotiating a smaller payment, you want to get an agreement in writing from the collection agency before you pay it.

"I had a client who paid a collection company for an account for a phone bill and they never recorded the payment," explains Kelly. "The phone company got the account back as uncollected and then (it) was sold to another collection company. We had to prove it was paid. This client had the old bank statement showing it cleared her bank but it was a huge hassle, time-consuming, and the new collection did appear on her credit report, which has since been removed."

It's also usually best to pay with a certified check from your bank, or using online bill pay from your bank account so you have a record of the payment without providing the agency details about your checking account.

If you are settling a debt for less than the full balance, it's essential that you get a letter from the collector detailing the terms of the deal, and confirming that no further balance will be due before you make a payment. "No letter, no deal, no exceptions," insists Charles Phelan, founder of the DIY debt settlement firm

Step 5: Monitor Your Credit Reports

If your goal in resolving these accounts is to improve your credit scores, you will likely be disappointed. Paying collection accounts does not remove them from your credit reports. And, with the exception of the new VantageScore 3.0 model, paying a collection account isn't likely to help boost your credit scores. These accounts are considered negative, paid or not.

This can be incredibly frustrating. One of our readers, "Alyssa" wrote on the blog:
Hello, I recently (within the past month) paid off two credit card accounts that ended up in collections with the intent to fix my credit score by doing so. Now that I have read this, I feel foolish to have even paid them at all. How can I repair and build my credit score now? Since paying off my collection accounts would not help anyway.

Even if taking care of these bills won't immediately help your scores, there are still advantages to resolving them:
  • No more collection calls or letters for that debt; and no new accounts if the balance is sold to a new agency.
  • You don't have to worry about being sued for the bill. (This is less of a worry for older debts where you can raise the statute of limitations as a defense if you are taken to court.)
  • You may be able to get loans that are off-limits if you have unpaid collections on your credit reports.) For some mortgage loans, for example, the lender may require you to pay a collection account as a condition of getting the loan.

Of course you have to weigh those advantages against the money you'll spend. But if you do decide to pay them, it's a good idea to monitor your credit reports and scores to make sure the accounts are listed as paid, and to make sure that no new ones appear on your reports. In addition to, which we mentioned above, you can get an easy-to-understand overview of your credit standing, along with your credit scores, for free using's Credit Report Card.

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