About five years ago I had some collection accounts opened up against
me. I didn't realize it until recently and have now started the
process of paying them off. I was curious how long this will affect
my personal credit. Also, some of the companies have offered to
let me settle for less than the original amount. Should I take this
I don't know how you could have missed five years of collection
activity unless you were in a coma, a jail or at the South Pole!
But I'll give you the benefit of the doubt that the six months of
notices, statements and phone calls, followed by 60 more months
of increasingly escalating collection activity, did not reach you.
This is an excellent example of why I recommend readers check their
credit reports regularly. The collection accounts snuck up on you,
and you might have been able to keep the accounts from going to
collection if you had known what was on your report.
However, since we can't go back in time, let's move
forward. Collections on your credit history are not great. "Paid
in full" collections are still negative, but much better than
those with a balance. So you are on the right track by paying them
The accounts can be legally reported on your credit
report for seven years. Under the Fair Credit Reporting Act changes
of 1998, the seven-year clock started ticking when you first went
30 days late in the sequence of events that led to the accounts
being charged off. So you probably have about a year and a half
to go before the items drop off your credit report.
Your question regarding taking a settlement offer
is an easy one for me. You owe the money, pay it! But a collector
may be willing to take less, for two reasons: First, the longer
a debt goes unpaid, the more nervous the creditor becomes. This
is because debts, unlike wine, do not improve with age. So a discount
for risk makes dollars and sense to a collector. In layman's terms,
better to get something now than nothing later. Second, the old
accounts may have been sold outright to the collector for pennies
on a dollar. In this case, even a steeply discounted repayment could
represent a substantial profit to the collector.
Paying less than is owed may be attractive, yes. However,
whether you paid your accounts as agreed is one of the factors that
go into computing your credit score. So, you might want to consider
what is more important, improving/maintaining your score or paying
less than is owed on your accounts.
One last thing to consider when deciding on settlement
of accounts is that the IRS considers the difference between the
amount owed and the amount paid as income. Depending on the size
of the debts, the collectors will report to the IRS how much money
was forgiven in the settlement and you will be responsible for paying
income taxes on that amount. As the saying goes, only two things
in life are certain, and one of them is taxes!
Finally, if you end up settling for less than the
amount owed, you can try negotiating with the collector to report
to the credit bureaus that your account was "paid in full."
If the collector agrees to this, make sure you get the agreement
in writing before you make the payment.
Steve Bucci, the Debt Adviser, is the president
of Consumer Credit Counseling Service of Southern New England. Visit
for additional debt
advice or ask your debt question here.