If your canceled account has ever traveled to the dark world of collections, then you’re familiar with aggressive calls several times a day asking you to “pay or else.” What you may not be realizing is the more long-lasting and insidious nature of the collection process: the devastation of your credit score.
Score of 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 collections 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’s 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 much as 125 points. Why the fall? The algorithms used to formulate Jane’s credit score do not carry the same weight. The late payments make up 35 percent of Jane’s credit score and then they hit her again with the collection account making up 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 spout when trying to force Jane to pay her debt. A collector will almost always use the removal of an entry from 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 is this combated? Make removal of the collection account from your credit report a precondition to any settlement negotiations. This position, if firmly established and applied consistently throughout the negotiations, could make a difference of tens of thousands in interest paid over the next seven years.
Although there are many lessons to be learned from Jane’s story, the key takeaway is never to underestimate the importance of negotiating an elimination fee. No matter how much collectors say they can’t (can) or won’t (will), you should make removal of a negative business line a precondition to any discussion with a collection agency.