Beating the Collection Companies

A recent article in Kiplinger personal finance talks about lingering debts and how it can destroy your credit:

Q: I recently checked my credit report and found a $104 collection account dating from July 2006 for an unpaid utility bill. Xcel Energy claims I owe $86 from 2001, when I was in college, but I was never notified. This has knocked 100 points off my credit score. What can I do?

A: You may have to bite the bullet and pay the bill. That will at least get the collectors off your case -- but unfortunately it won't help your credit score. "Having a collection account on your credit report is statistically significant for predicting future delinquency," says Craig Watts, of Fair Isaac, the company that compiles the FICO credit score. "What you do later on what that account doesn't change its significance to the scoring formula."

In reality, after three years (the statute of limitations in Arizona) you can no longer be sued for that debt (three years for credit card debt and oral contracts, six years for written contracts and five years for promissory notes). If you're unsure of what the statute of limitations is in your state, here's a great interactive map from Bankrate. Should the company or collection agency continue to report the debt, know that you have rights and must stand up for yourself.

I think it is morally important to pay valid debts, but if you choose not to pay the debt for whatever reason -- unfair billing, for example -- you might just have to live with collection agencies calling you for a very long time. It's called Zombie Debt Collecting. Collection agencies buy that debt for pennies on the dollar, so if you pay the full amount, practically all of it goes straight to their pocket. Should you decide to pay very old debt, consider paying the original company rather than the collection agency. This keeps an unethical company from getting your money -- and possibly selling your debt again without reporting it collected.

Also, once seven years has passed, you may have to write to each of the three reporting agencies to ensure they actually drop the mark against you. I was surprised to find 9 and 12 years debts -- that had been long paid -- still on my credit report when we decided to buy our house. And, a student loan that had been paid had been accidentally marked "delinquent" rather than paid by the loan company! That was a shock.

If you're curious about your score and what's on your report, you can now check your score for free once a year at AnnualCreditReport.com.