Understanding Collections

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 penaltyWhen 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 the penalty goes away after 2 yearsSee the graph below
  • The penalty for a collection is the same 20 points if it's $50, $500 or $5,000

The dirty little secret

  • Collection companies by old debts from companies you had an account with that was closed with an outstanding balance
  • Collection companies buy these accounts for $.03 pennies on the dollarExample: $500 Debt they buy for $15 for the right to collect the $500 from you
  • As you can imagine even if the collection company gets $50 out of you, the make over 300% profit on their investmentIf you pay $100 then they make 660%, If you pay $500 they make 3,300%
  • The money you pay the collection company stays with the collection companyThe original company gets none of the payment as it already wrote off the account for a tax credit

What actions should you take?

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 is worth 20 points?
  • Ask yourself if the timing of the points will make a big difference if you are about to buy a home or carAs this 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!