You can remove collections from credit reports by negotiating with debt collectors. This approach has a low success rate, particularly when removing genuine collection accounts. However, it works on some occasions and with a few companies. You should still give it a shot despite the odds. Credit scores...
You can remove collections from credit reports by negotiating with debt collectors. This approach has a low success rate, particularly when removing genuine collection accounts. However, it works on some occasions and with a few companies.
You should still give it a shot despite the odds. Credit scores can improve enormously, even from the 500s to the 600s, after removing a collections account. So, let’s learn how to remove collections from credit reports with three key methods, including asking for Goodwill deletions and negotiating a pay-for-delete agreement.
- How to Get Collections Removed from Credit Report?
- How do Collections Affect Credit Score?
- How Long Does a Collection Stay on Your Credit Report?
- Should You Hire a Credit Repair Company to Remove Paid Collections?
- Bottom Line
How to Get Collections Removed from Credit Report?
First things first, where do collections accounts come from? Well, trouble starts after the borrower misses an upcoming payment. After 30 days, the lender reports the missed payment. If the borrower fails to pay in subsequent months, the lender reports all the late payments, harming scores further.
The debt keeps growing as the interest, and late fee penalties pile up. Before long, over 180 days may have elapsed since the last payment. At this point, the lender decides to charge off the account. That means writing it off as a loss in their books and selling it for pennies on the dollar to debt collection agencies.
Debt collections accounts appear as separate accounts on credit reports and are very serious derogatory marks. All hope is not lost, though. Consider the following steps to get rid of collection accounts from reports:
Step 1: Write a goodwill letter
Paying off collections accounts doesn’t mean that the bureaus will remove the collections from the credit report. Consider negotiating for a goodwill deletion to have the paid collection removed. How does it work?
Asking for Goodwill involves recognizing that you have made a mistake. You then ask for forgiveness from collection agencies. The strategy commonly works when dealing with 30-day late payment entries and with original creditors.
Now, the formal way to ask for a goodwill deletion is to write a goodwill letter. For it to work, you generally have to give a good reason and explain your situation. For instance, you may state, “I was unable to pay the debt following the loss of my job. As soon as I recovered from the financial hardship, I made sure to pay the debt promptly.”
An effective goodwill deletion request also states how the continuing presence of the credit account in the reports will affect future situations. For instance, you may say that you’re planning to apply for a mortgage, and the collections account may cause you to be disqualified.
Negotiating with a goodwill adjustment letter may not work because the agency may lack the motivation to delete the paid account. They have already recouped their investment and made profits.
The success rate is also low because CRAs require information furnishers to maintain accurate records. They discourage deletions as they alter the customer’s actual creditworthiness.
If debt collectors are less inclined to remove collections from credit reports, does it mean that you should not pay off the collection account? Not quite. There is an added incentive as new credit scoring models such as FICO Score 9 and VantageScore 3.0 don’t negatively score paid collections accounts.
The only impediment is that most lenders are still using FICO Score 8 that considers all collections accounts. As more lenders move to newer scoring models, you don’t have to worry about the effect of paid collections accounts.
Step 2: Negotiate with a pay for delete letter to remove settled collection accounts
Debt collectors purchase debts from original creditors, sometimes for 4 cents on the dollar. Therefore, they reach settlements with customers all the time. If you paid off a debt collection account without paying the full amount, it may show up in reports as settled instead of fully paid.
Settled accounts are considered negative because it means the collector failed to collect the outstanding amount. The account status can have a slightly greater impact on scores than a paid-in-full account.
Now, if you have a bit of money saved up, it’s possible to approach the debt collector and offer to pay all that you previously owed despite closing the account.
If you’re coming back to the negotiating table, you may consider asking for more than a simple account status change. You can offer a pay-for-delete agreement. The strategy is commonly used when having unpaid collections removed from credit reports. So, how does it work?
Well, you start off by writing a pay-for-delete letter to the debt collection agency. It states that you intend to pay the debt fully. However, the collector has to agree to certain conditions before the payment.
You may ask for their collections account to be deleted from the credit reports entirely. The letter can also stipulate that the creditor should not disclose the agreement to any third parties. After agreeing to the terms, it’s good practice to ask for an authorized representative of the company to put the agreement into writing.
There are various sample letters to remove collections from credit reports. We like the following template from Lexington Law, one of the leading credit repair firms. You’ll just have to modify it to detail that the account was already settled.
There are a lot of risks involved. Remember, there is no legal stipulation that requires the debt collection agency to honor the agreement. They may argue that they are not authorized to remove the account from the credit report, only change the account status to show that it’s now fully paid. The agency must be willing to reopen the closed account for this to work.
Step 3: Dispute debt collection accounts with errors
Many credit reports have errors, and you may be a victim of bad reporting. So, if you see a paid collections account that you don’t recognize, file a dispute with the respective CRA.
The procedure of disputing a collection account is straightforward:
- Obtain free credit report copies from annualcreditreport.com.
- Check all credit accounts for reporting errors.
- Report the debt to the credit bureau by sending a dispute letter or using online dispute centers.
- Allow 30 to 45 days for re-investigations.
- Review the investigation report and file a redispute if necessary.
As long as there were inaccuracies, credit bureaus will have the collection account removed. If the challenge is not successful the first time, don’t give up. Just file it again.
The law also allows consumers to send a debt verification letter if they are uncertain about the original debt. First, find out the owed amount by referencing the debt validation letter sent before collection efforts start. If you have doubts, write to the agency.
How do Collections Affect Credit Score?
Payment history is a major factor in credit score calculation under the FICO and VantageScore scoring models. myFiCO — a consumer division of FICO — states that having few incidents of late payments will not heavily affect scores. But public records such as bankruptcies and collection items are very serious. How many points can collections remove?
The impact on scores will vary depending on the consumer’s current score, prior history with credit, credit mix, among other factors. For instance, someone with scores in the 700’s will experience a larger drop than someone with scores in the lower 600’s. In some situations, collections can lead to a 100-point drop.
For a more accurate estimation tailored to your financial profile and payment history, consider using a credit score simulator.
If you have a collections record that is not going away anytime soon, Experian recommends finding other ways to improve creditworthiness, such as:
- Paying-off unpaid collection accounts because lenders will see that you took appropriate actions to remedy the situation;
- Budgeting ahead to avoid more missed payments;
- Trying to add information about utility payments and other bills to credit reports;
- Keeping a low utilization rate on revolving accounts and not closing older accounts.
How Long Does a Collection Stay on Your Credit Report?
Most negative items will fall off reports after 7 years, including:
- Collection accounts
- Missed payments
- Chapter 13 bankruptcies
- Charge-off accounts
*Chapter 7 Bankruptcies have a shelf life of 10 years from the date of filing.
Because lenders charge off accounts after 180 days, collections accounts should be removed in 7 years and 180 days from the first date the account became overdue.
A collections account will have less impact on scores the more it ages. For instance, a 5-year collections record will not have the same impact as a 6-month old record.
Major credit reporting bureaus also ask customers to ensure that collections accounts don’t stay on reports for more than seven years. You can always review your credit report and submit a dispute to have errors removed.
When you pay off collections, how long should you wait until it’s reflected in the score? If the lender uses newer scoring models that don’t consider paid collections, you should see an improvement in 30 days. Alternatively, you can request rapid rescoring. It allows creditors to report to bureaus ahead of the standard 30-day schedule.
Should You Hire a Credit Repair Company to Remove Paid Collections?
Hiring a company to fix collections accounts should be done with the right expectations. That’s because these services cannot challenge legitimate entries and have them removed. They only dispute negative information that the client believes to be wrong.
It’s not worth it to subscribe to paid repair services if you’re challenging a handful of items. If the prospect of writing a dispute letter seems challenging, just create an account with any of the bureaus and file a dispute online.
Consider your financial situation when determining whether to hire outside help. For instance, customers pay about $80 to $130 for paid credit repair services. If you can save money, it may be better to pay down the debt owed to collection agencies.
Another way to determine if you need paid services is to sign up for free consultations and speak to their reps. You may consider seeking the services of debt settlement companies. They try to settle the debt for about 40% to 60% of the total amount owed. The services also create budget plans and help customers save towards the settlement.
As with credit repair, you can negotiate settlements without any help. However, saving money towards the settlement may not be easy. Consider creating a budget and using smart savings techniques such as enabling automatic savings from your checking account.
There will be a final tax to pay after settling the debt. The IRS considers the difference between the settlement amount and original debt as income.
A word of caution about collection removal experts
Be cautious about the so-called collection removal experts. There are no legal grounds to remove collections accounts unless they have errors in them. While credit repair organizations exist, there are no businesses registered as dispute collection agencies.
Individual credit experts cannot remove legitimate negative items from reports, either. Don’t fall for their tricks. Similarly, a genuine credit repair firm should not advertise that they can remove legitimate entries.
The best ways to remove collections from credit reports include asking for goodwill adjustments or negotiating for pay for deletion. Both options depend on the graces of the lender.
Customers should also periodically review their reports for errors. Only opt for collections help from credit repair firms if your budget allows it and you have enough to pay off the debt.
Lastly, based on the huge impact of collections accounts, it is better to avoid the entries in the first place.