As a disclaimer, this is actually a re-post of an article I wrote some years ago and had on a different blog. The focus of that blog isn’t financial, but I had that blog way before I purchased this one. Because the topic fits better here, I’ve moved it here and updated it a little bit but otherwise the information is still the same as it was when originally written.
Many people have had at least one credit card or something go to a collection agency. Sometimes it’s legitimate, sometimes it’s not. We’re going to talk about the legitimate ones, where you know you either fell behind in payments or stopped making payments, and now a collection agancy has tracked you down and is trying to get you to pay it off.
Here’s the deal. Credit card companies, or whomever else, will do what they call a “charge off” of the outstanding amount you owe on a claim. When you fall behind on your payments, they attach all these fees to the original balance, usually around 15 to 50% a year, but when it finally gets reported to the credit reporting companies, the amount they’re allowed to charge off is the actual amount you owe, not all those fees. So, if you owed them $2,000, even if they tacked on $1,000 worth of fees, they can’t report all that and won’t get paid for it either.
Why is it important? Because they have these collection agencies known as “scavengers”, that buy all this debt at between 5 and 8 cents on the dollar, look at what the amounts were with all the interest, then start pounding your phone trying to get you to start paying on all of that.
If you’re ever contacted by a collection agency about an outstanding amount, you need to take a couple of steps before you agree to anything.
The first step is to provide proof that you owe an outstanding balance to begin with. Even if you know you owe something, by law collection agencies can’t proceed until they give you proof via regular mail showing you all the information that was provided to them by the creditor.
The second step is to immediately get a credit report of your own. Every person in the United States is allowed one free credit report a year from annualcreditreport.com, which is part of the federal government’s plan to help all consumers be able to check on their financial status.
The reason you want to do it is if you make even one payment, or set up an agreement on the amount that the collection agency tries to get from you, by law you now are responsible for all of it. By getting your credit report and the information from the collection agency, you’ll see how much your original creditor charged off legally and, by rights, you can start your negotiations from that amount instead, minus all those fees.
You could end up paying thousands less based on having this information, but it also gives you a major negotiating point. Sometimes if you can pay the entire amount quickly you can get them to reverse the negative note on your credit report, which is important because otherwise it can stay on there for up to 7 years and give you grief if you try to get a loan of any kind.
They don’t want you to know this, obviously, but I’m telling you how it is. If you want more information on it, read the Fair Debt and Credit Collections Act; it’s there for your protection. Make sure to always know your charge off amounts; you could save a lot of money and grief on the back end.