Having a debt in collections is a story many Americans know well. Roughly one-third of U.S. consumers were contacted by a debt collector or creditor in the 12 months leading up to January 2017, according to a Consumer Financial Protection Bureau (CFPB) report.
When an account is sent to collections, that means that the account has fallen behind on payments and has been turned over to a third-party debt collection company tasked with recovering the owed debt. It goes without saying that delinquent accounts can seriously drag down your credit score.
There isn’t an exact formula for how much a delinquent debt dampens your score. Martin Lynch, a certified credit counselor and director of education at Cambridge Credit Counseling, said that it’s all relative to whatever else is on your credit report. Either way, you can expect an account in collections to stay on your credit report for seven years.
But if you have an account in collections, there is light at the end of the tunnel. We tapped credit experts to shed light on the best ways to tackle your situation and get your credit back to where it should be. And it all starts with picking up the phone when debt collectors call.
What not to do when debt collectors call
Your intuition may tell you to duck and cover, but avoiding a debt collector could put you in financial and legal hot water. Debt collectors are nothing if not persistent. More than likely, they’ll continue reaching out to you. And those who feel ignored may escalate their efforts and file a lawsuit against you.
“Don’t put off the discussion you need to have with your creditor,” said Bruce McClary, a spokesperson for the National Foundation for Credit Counseling. “If they need to reach you about a payment you’ve missed, answer the call, open the letter, open the email, read the text — and reach back to them if you don’t connect on their first attempt.”
In other words, lead with an honest and open conversation and take it from there. The best time to set things right and preserve your credit rating, according to McClary, is during the earliest stages of debt collection, when your account may still be open.
“At that point, you want to be limiting the possibility of further damage to your credit rating by letting the account continue to slide off the cliff,” he said. “The instinct to run and hide, while it may feel natural, is absolutely against your best interests.”
Don’t blindly agree to pay the balance
“You shouldn’t agree to make any kind of payment or even acknowledge the debt until you’ve confirmed that it’s yours and you know the date in which you made the last payment if you made any,” Lynch said.
There are statutes of limitations on debt that vary based on your state and the type of debt you have. All this means is that debt collectors only have a certain amount of time to file a lawsuit to recover payment. Three to six years is the norm. The problem is that making a payment revives the statute of limitations, Lynch said.
“That’s particularly dangerous if the debt is approaching or has already passed the statute of limitation,” he added.
First things first: Confirm the debt is actually yours. The CFPB recommends finding out who the original creditor is, what the debt is for when it was incurred and how much is owed (including interest and fees). You’ll also want to confirm the debt collector’s name, address, and phone number.
To protect yourself from scam artists, request that debt collectors contact you in writing. Until then, don’t dole out any financial or personal information. It may turn out that the collector doesn’t own that debt, or they’re looking for somebody else. (If it’s the latter, and that information has found its way onto your credit report, read this guide to learn how to dispute the error.)
The takeaway here is always to request validation of the debt from the get-go. Consulting an attorney is another easy way to clarify a particular debt’s statute of limitations.
Don’t record phone calls without the debt collector’s consent
There are laws in place to protect consumers from being harassed by debt collectors (more on this in a bit), so it may be tempting to record your conversations. There’s an app for everything these days, making it pretty easy to tap a button and have immediate proof of what was said — but tread carefully.
According to Lynch, you need to prove that you had their consent to do so. If it’s a phone call, it means getting their verbal consent while the tape is rolling. Otherwise, you could inadvertently find yourself guilty of wiretapping. In general, Lynch recommends keeping a record of all interactions. If, for instance, you want to request that a debt collector stop contacting you at work, put it in writing and send them a certified letter.
Thanks to the Fair Debt Collection Practices Act (FDCPA), they’re legally obligated to back off. The gist of the law is that it keeps debt collection agencies from using “abusive, unfair or deceptive practices to collect debts from you,” according to the CFPB.
Don’t be afraid to ask for help
If debt collectors are stressing you out, take heart in knowing that you don’t have to go it alone. A credit counselor can help you understand your rights and work with creditors to repay the debt as affordably as possible.
“Nonprofit credit counseling can help you create a roadmap where you can get back on track with your budget and your payments to your creditors so you can pay off the debt in a way that’s far more affordable and gets you to a point where you are debt-free much faster,” said McClary.
Check out MagnifyMoney’s guide to finding the best credit counseling options for you.
What to do when debt collectors call
Even better than being responsive to debt collectors is being proactive.
“Reach out and be the first one to call,” McClary said. “Don’t let it get to the point where somebody has to call you. Make the first move, tell them what’s going on with your situation and that you might be missing a payment.”
A creditor’s internal billing department will always try to collect payment from you before assigning it out to a third-party debt collection company. If you’ve stumbled on hard times and anticipate having trouble making your regular payment, give them a heads up to see if they’re willing to work with you. The more proactive you are, according to McClary, the more likely they’ll accommodate your situation. For instance, they may be able to give you the option to miss a payment or to make an interest-only payment.
The idea is to stay on good terms with them and make a good-faith effort of transparency.
“Your negotiating position is far better when you’ve been a good customer up until this point,” he said. “If you have a payment history that’s on time and historically maintained as agreed, you’re in a better position to negotiate a way to avoid any further debt collection issues and come up with an amicable solution.”
Negotiate the terms of your debt
There’s almost always room for negotiation when dealing with debt collectors. According to Lynch, some debt collectors are paid on commission, so it’s in their best interest to get you to settle the account here and now. That’s not to say that establishing a payment plan is out of the question, just that you may be able to come out paying much less than you actually owe.
It’s all relative to the amount owed, Lynch said. If you owe $3,000 and they’re willing to settle it today for $1,000 — and your budget can swing it — that’s not a bad deal. If you simply don’t have it, see if they’ll meet you in the middle with a monthly payment plan.
“Don’t be afraid to say no if you’re negotiating a payment amount,” said Lynch. “If you can really only afford $75 a month, don’t agree to anything higher than that. If they’re threatening legal action, they may be just bluffing because what they really want is to get every dollar they can as quickly as they can, so stick to your budget.”
Know your rights
Again, consumers are protected by the FDCPA, which safeguards them against shady debt collectors. These laws apply to the collection of mortgages, credit cards, and medical debts, among others.
“If you’re being contacted by debt collectors, know what your rights are and what debt collectors are required to do by law,” said McClary.
For starters, they’re restricted in how they’re allowed to make contact. They cannot reach out to you prior to 8:00 a.m. or after 9:00 p.m., and they have to stop contacting you at work if you request it. The laws are designed in a way that prevents harassment.
Be that as it may, one CFPB study found that 27% of consumers who were approached about debt felt threatened. What’s more, almost 40% said that debt collectors were attempting contact at least four times per week.
“They also are required to honor any request to be contacted at all, but I’d caution people because for your own benefit, you don’t want to cut off all communication with the creditor if it’s truly a debt that you owe,” added McClary.
Take control of your debt
It’s never too late to get your finances back on the right track, even if you’re at a point where you’re getting calls from debt collectors. The good news is that once you face the music and begin making good on your old debts, your credit could improve. When you strike a deal to pay off a collection account in full, Lynch said it has a positive effect on your FICO 9 credit score since it will no longer factor that account into your rating.
“There’s no set amount of points gained or lost for any of this,” he added. “It’s all relative to whatever else is in your report that month How much good information do you also have in that report?”
Far and away, the most important thing you can do for your credit health is to make on-time payments from here on out. Your payment history makes up a whopping 35% of your FICO score.
“The main thing to do is focus on keeping all your other financial obligations paid as agreed,” said McClary. “In order to rebuild your credit rating, it’s important to focus on the things that are going to get you the most traction. Making your payments on time is absolutely priority No. 1.”
In extreme situations where your credit score has been severely damaged by collection accounts, you might have to open new accounts to establish a healthy credit history. Your options may be limited as a lower credit score generally translates to higher interest rates and fees, but paying off your balances in full each month reduces the likelihood of getting in over your head. If you want to begin rebuilding your credit, a secured card may help, assuming you can handle it responsibly.
Having debts in collections isn’t the end of the road, so long as you know your rights and establish a financial plan for getting back on the right path. Put it another way: Rehabbing your finances (and credit score) is more than possible.