A debt collection and charge-off are the worst types of credit account delinquencies which are the result of not paying bills for several months. These usually occur after 180 days of non-payment; your credit issuer charges off your account and transfers it to debt collection agencies. The collectors will now be responsible to follow up with you through different means till they collect the debt.
A collection or charge-off is very detrimental to your credit score and remains on your report for seven years. This can affect your chances of getting approved for new credit cards. You can dispute wrongly reported collection or charge-off but if the report is correct, here are steps you can take to rebuild your credit after a collection or charge-off.
01 Get a $0 Balance | Rebuilding Your Credit After A Collection Or Charge-Off
Paying off a collection or charge-off balance won’t delete the item from your credit report and it won’t help your credit score right away. However, a paid balance is always better than an unpaid one, especially if you’re trying to get a new credit or a major loan like a mortgage.
Before you pay, draft a pay for delete letter offering to pay the balance in full in exchange for having the item removed from your credit report. The creditor or collector may deny your claim but it’s worth a try.
Settling the debt is also an option if your creditor agrees, but keep in mind your credit report will reflect that you settled the account. A settlement can also hurt your credit score in some cases.
Worst case, just pay the balance in full. Or, if the account is old, like 6 or more years, you could wait and let it drop off your credit report. The credit reporting time limit for collection accounts is seven years. For a charge-off, it’s 7 years plus 180 days from the date of the first delinquency.
02 Send a Goodwill Letter | Rebuilding Your Credit After A Collection Or Charge-Off
A goodwill letter is similar to a pay for delete letter, but instead, you request that the creditor or collector remove a paid account from your credit report as a courtesy. Briefly explain why you became so late. There’s always a chance that whoever receives your letter is feeling generous and will update your account. It’s a long shot but you can give it a try.
03 Keep Paying Your Other Credit Cards and Loans on Time
The best way to rebuild your credit after a mistake like a collection or charge-off is to get some positive information on your credit report. If you still have active credit cards or loans, continue paying them on time. The same thing goes for accounts that aren’t reported to the credit bureaus. These can be sent to collections and also wind up on your credit report if you fall behind on your payments.
04 Get New Credit in Your Name
You’ll have to open up new accounts if all your other accounts were charged-off or sent to collection. You may have already experienced difficulty in getting credit with bad marks on your credit report. A select few credit card issuers offer credit cards for rebuilding credit. Alternatively, save up a few hundred dollars and open a secured credit card. You’ll receive your security deposit back as long as you don’t default on the credit card balance.
Give It Time
Your credit score will begin to improve as you use your credit cards and pay on time every month. You can monitor your credit score progress by using a free credit scoring service like Credit Karma or Credit Sesame. It usually takes time but your credit score can bounce back.