|Posted by Frank Johnson on April 28, 2010 at 4:03 PM|
If you have an account in collections and pay as agreed, does your credit rating go up? Well...
By Sheryl Harris, The Plain Dealer
April 25, 2010, 12:00AM
The Question: They say the best thing for your credit report is to pay bills on time. I draw a pension but am unemployed, so I'm behind on a lot of bills. Some have gone to collections, where I've made payment arrangements. Since I'm paying those as agreed, am I considered to be paying on time?
Also, some things will "age out" of my credit report this year. Will my credit rating go up because the report lists fewer bad accounts, or go down because they haven't been paid?
--Roger Norris Painesville
The Answer: If you work out a payment arrangement with your original creditor and pay as agreed, your creditor will report your payments as on time.
Even if you've messed up in the past, if you can get on track and make your payments on time, every time, your credit rating will go up.
Collections, though, are a different matter.
Having an account go into collections creates a scuff mark on your credit report until the debt is paid off, says Jeanne Morton, who helps people mend poor credit in her work with the Cleveland Housing Network.
Debt collectors don't report monthly payments – which is probably good news to many debtors.
Morton says you're doing the right thing by attacking those old debts. "You're better off taking responsibility and dealing with it instead of trying to find a way out," she says. "There are too many things that wind up following you. Debt, you want to get out of your life."
If your debt has been sold, you may be able to settle for a fraction of what you owe. If you negotiate a lower settlement, ask the collector to give you something in writing that confirms that your payment will settle the debt in full. Otherwise, the remaining debt could be sold and you'll get new rounds of collection calls.
Derogatory information like charge-offs and collections accounts must be removed from your credit report seven years after the creditor notifies you that you're delinquent or puts the account in collections, according to the Federal Trade Commission.
Bear in mind, collectors can still try to get you to pay a debt even after it can no longer be reported. (There's a different clock for that.)
There are some exceptions to the seven-year credit-reporting rule. Bankruptcy information can stick around 10 years.
Unpaid judgments, the Federal Trade Commission says, stay on your report seven years or until the statute of limitations runs out, whichever is longer.
Be vigilant about checking your credit reports, because you have a right to have wrong information corrected.
Will your credit improve once bad accounts age off? It depends.
If you still have some well-tended old accounts, maybe. But if all your accounts are in collections and get wiped off your report, you might end up having no credit history, which can make it almost as difficult to borrow as having a poor credit history. So as you try to get squared away on your debts, start working toward re-establishing good credit.
Consumer Wise Building good credit is a slow process.
Start with the basics.
• Request your free annual credit report to make sure it's correct. To get your free reports, you must go through the three credit bureaus' shared site, https://www.annualcreditreport.com/cra/index.jsp, or call 1-877-322-8228. You're entitled to one free report from each bureau every 12 months, but if you find errors, you can get an additional free report when your report is corrected. You'll need to provide your Social Security number to get your report. Don't waste money buying your score.
• Take care of your existing credit accounts and loans. A ding on your credit in the past counts much less with lenders if you can show that you have steadily been paying on time, every time, ever since. Make paying down high credit card balances a priority, and try to avoid high-cost credit like cash advances.
• Open a savings account with a credit union or bank and then add a checking account, taking care not to overdraft. It's sometimes easier to get a credit card or loan from an institution with whom you have a good history.
• Learn to manage money so you don't fall back into bad credit habits.