Charge-offs and collections happen from time to time for many of us. Life happens, and sometimes it happens in a way that haunts you for years!
Let’s say you have a perfect and long-term payment history with a creditor when suddenly – BOOM! Something happens that causes that perfect payment history to become late.
Life happened; it is ok. But being continuously late can damage your credit report for quite some time. Your payment history consists of 35% of the total credit score. Lenders don’t like late payments, and it’s a red flag to anyone running your credit.
Example: you have a credit card with a $1000 balance, you stop making payment or miss a payment, you are then charged a late fee plus interest. This may push your balance over the limit, and you are also charged an over-limit fee.
Another month passes by, and you’re not able to bring it current. So you’re charged another late fee, then another over-limit fee, and more interest. It’s a classic snowball effect. So when people ignore their bills, they don’t go away; they grow.
After 3 or 4 months, it becomes $1500. They try desperately to reach you. They then pull a legal maneuver to mitigate their losses which are called a charge-off. This is a debt that is unlikely to be collected by the creditor because the borrower has become seriously delinquent over a period of time.
To the borrower, this can cause real problems for your credit history and your ability to borrow in the future.
Having a charge off on your report does not mean you don’t have to pay this debt either.
Once a creditor deems your delinquent debt is no longer collectible, they may sell it to a debt buyer or put it into their internal collection department.
A collection occurs when a creditor has a debt, they deem no longer collectible and charges it off. Or you become late on a bill and are behind enough to where the creditor closes your account. They then try to collect what is owed up to that point.
But debt collectors and collection agencies have rules they must abide by. These rules are called the Fair Debt Collection Practices Act.
A couple of the key takeaways from the Act is that they can’t harass you by making verbal threats. And they cannot call you outside of certain hours. They can’t make false statements.
For example, claiming they are attorneys when they are not. Claim that you committed a crime and inflate the amount you owe.
The debt collection industry is booming, and collection accounts are the most common derogatory item on consumer credit reports.
A billion calls each year for collections. That’s 250K collectors working. Fourteen trillion dollars in collections every year.
Additionally, 1 in 4 Americans have a collection on their reports, and 52% are medical, and 7% are student loans in default.
If all else fails, it may be time to bite the bullet and make a payment arrangement.
You may be able to offer a pay-per-delete. Many collection agencies will do this, but some will want full payment.
Another option is to offer a settlement. But be careful when settling. It is important to get this in writing.
And if you have a collection set to fall off your credit report, some unscrupulous collectors may even restart the status date. And the collection will stay on the report for another seven years.
Use your best judgment. If you have collections or charge offs you should educate yourself to understand the industry fully. This way, you know what your rights and responsibilities are.
For these reasons, it’s best to work with a professional who knows the ins and outs of the business. Or educate yourself and tackle these on your own. Either way, they must be dealt with.
*Note: We are not attorneys, and we are not giving legal advice. Make sure to use your best judgment when dealing with your collections and charge-offs.
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