Ask the Experts: Three questions about debt, debt collection, and credit reports
Hi, I am not working now and would like to eventually pay for my debts; however I’m not able to do so at this time. Should contact the credit agencies to notify them or wait until I get a job? – Nicole
I’m sorry to hear about your situation. Being out of work is stressful enough without having to worry about debt payments.
When your income is disrupted, your debts are usually the first thing to go on the back burner. Creditors understand this and in some cases may be able to defer your payments for a short time while you get your finances back in order. As soon as you know that your ability to pay your debts is going to be compromised, contact your creditors. They might not be able to do anything for you, but in a lot of cases they can provide hardship assistance.
Every creditor is different, though, and each policy is unique. So call them and find out what they can and can’t do for you.
Unfortunately, if they can’t offer you a hardship program and you can’t pay, your accounts will likely become past due. Once you have a steady income again you may want to consider speaking to a debt counselor about a possible Debt Management Plan to help you get caught up and, in some case, bring certain past due accounts current.
If my debt has gone to a lawyer for collection, will it show up on my credit report? – Chelsea
The short answer is yes.
The long (potentially unnecessary, but bear with me) answer is that the account appears on your credit report the moment it’s opened. The status of the account changes over time.
In this case, I would assume that at some point in time you were no longer able to make payments on the account. Your credit report would reflect that the account was 30 days delinquent, then 60 days delinquent, and so on until it was charged off and sent to a collection agency.
The account will remain on your credit report for approximately 7 years from the time it was charged off. The status right now is probably showing as charged off and unpaid, and there’s an excellent chance that it’s hurting your credit score. Even if you pay off the debt, the account will still show on your credit report. The status will change, however, to reflect that it’s been paid off, which should help your credit.
A few years ago, I hit an economic slump and my credit suffered. I am trying to rebuild my credit but after reading and researching online, I hear that paying off a debt collector doesn't help your credit. Is this true? – Nidia
As I alluded to in the previous question, collection accounts don’t drop off your credit report for 7 years, regardless of whether or not you paid them off.
People often make the mistake of assuming that correcting a credit-related error makes that error go away. It doesn’t. If you miss a payment and then get caught up the next month, your credit report will continue to note that you were once 30 days past due.
The good news is that as time goes by, those negative marks have less and less impact on your score. A 30 day delinquency from three years ago will hurt a lot less than one from 3 months ago.
So when you hear that paying off an account in collections doesn’t help your credit, that’s incorrect. It doesn’t make the fact that your account was charged off go away, but it does change your report to reflect that the account was eventually repaid, and that does help your score. Maybe not as much as you’d like it to, but you have to keep in mind that the purpose of your credit report is to help lenders decide whether or not to extend you new credit. The fact that you defaulted on a debt is important for them to know; as is the fact that you ultimately did pay back the debt (although obviously not under the original agreed-upon terms).
If you can pay off your collection accounts, do it. Just make sure that you’re dealing with a reputable collection agency, and that they update the reporting of the account to reflect that you’ve paid it off.
Thanks for the question!