Only start dealing with collection accounts once your cash flow is under control and all your current obligations are being met. The main objective when negotiating collection accounts is to reduce as many collection accounts as possible to a $0 balance with the smallest lump sum payment. Use these tips to start paying off your collections:
- Create a list of all outstanding debt including the following information: Original creditor, collection agency, amount outstanding, date the account was submitted to collections
- Rank the outstanding debt in terms of urgency. Some of the most effective ways to rank collection accounts are as follows:
- By age of account. Give low priority to collections older than 5 years,. These will be dropping off your credit report within 2 years regardless of payment.
- By amount owed. With a set amount of money, you could pay down several small accounts or one large account. Having a smaller number of collection accounts with balances will result in a better credit score.
- By types of accounts. Give high priority to tax liens, child support judgements, student loan collections and other judgements to avoid wage and tax refund garnishment. High priority should also be given to collection accounts that may prevent you from obtaining housing in the future such as debts owed to apartment complexes or utility companies.
- By collection status. Give high priority to accounts that are still with the original creditor, but at risk of being sent to collections. Negotiating this before it is transferred to a collection agency will help maintain good credit.
- Collect a lump sum to offer as a settlement for each outstanding debt. If you don’t have a lump sum right now, consider using your tax refund or saving up for a few month until you have that lump sum to offer.
- Don’t set up a payment plan with a collection agency. A collection account is inherently negative. If you start making ongoing payments, it may continue to get reported as recent activity on a negative account, prolonging the negative impact. The exception with this is student loans. Many times a borrower’s status can be returned to good standing by establishing a payment plan with the student loan collection agency and sticking to it.