Misinformation about collections can keep you from enacting an effective action plan to address your debt. This week, we debunk three common collection myths. Your Compass coach can help you take a deeper look into these topics and create a personalized plan of action.
Myth 1: Paying off collections will automatically improve my credit score.
Choosing to address negative debt can be a sound financial decision that helps you avoid legal action from debtors and reach financial goals, like renting an apartment and purchasing a home. Some people may find that paying in full or settling the debt may not initially improve their credit score.
It is important to remember that when it comes to your credit score, time is a forgiving friend. As negative items age, they impact your score less. The key to improving a credit score after paying a collection or other negative item, is to focus on actions that can help you build positive credit history as your negative items become less impactful to your score. Prioritize paying on time, keeping your utilization low, and avoid adding new collections to your credit history.
To discuss options for improving your credit, reach out to your Compass coach. The following resources can help you learn more about factors that affect your credit score:
Video - Compass Shares: Credit Card Tips: This video covers tips on how to use a credit card to build your credit.
Basic Facts About FICO Scores: Page 2 lists the five components that make up your credit score.
Myth 2: The 7 year credit bureau reporting period on a collection resets each time a new collection agency purchases the account.
Collections remain on your credit report for 7 years and 180 days from the date of delinquency. By law, “delinquency” is defined as the month and year that the account first became delinquent in the eyes of the creditor. The delinquency date is the missed payment that led to the original credit account being closed by the creditor or sold to a collection agency. The date of delinquency does not change, regardless of whether the collection is sold to a new collection agency. So, a new collection agency that purchases the debt does not reset the clock on your collection to seven years.
If you notice a collection that is older than 7 years and 180 days from the delinquency date, then you have the right to request the removal of the collection from your credit report. Review Myth 3 for more information on fixing errors with the credit bureaus.
In addition to the reporting period for a collection, the debt also has a statute of limitations for how long you can be held legally responsible for the debt. After the statute of limitations has expired, a collection agency cannot pursue a lawsuit against you for the debt. If you have questions about the statute of limitations for your debt, thenyour Compass coach can provide you with a referral to a legal resource.
Myth 3: I cannot fix incorrect information on my credit report.
You have the right to dispute any false information that appears on your credit report. You can dispute incorrect demographic information, like age, address, and employment history. You also have the right to dispute incorrect account information or accounts that you do not remember.
When sending a dispute, it is best to mail a certified letter and include any documents that support your case. A certified letter allows you to make sure that the credit bureau receives your dispute and responds to you in time. The Federal Trade Commission (FTC) offers a sample dispute letter. You can also locate the addresses for the 3 major credit bureaus: Experian, Equifax, and Transunion.