Sometimes bills can get ahead of you, and when they do, you may find that you have negative information showing up on your credit bureau reports. This can have a serious impact on your credit rating and affects your ability to buy a car, a home or anything else on credit. Even if you are able to obtain a loan, a low credit rating will cause you to have to pay higher interest rates. One way to deal with this is to pay off your old debts and have them reported as paid in full on your credit report, reducing your debt and boosting your credit rating.
Save up enough money to pay off the debt in full, if possible. If it is an old debt that has gone to collections, you may be able to settle the account for as little as 25 percent of the total, though a minimum of 40 percent is more common.
Contact the creditor to discuss the situation. You can deal directly with the company regarding a payment amount and settlement terms by calling the number on your billing statement. Let the company know you have had some problems paying bills but that you are trying to clean up your credit and want to settle all of your old debt. Be honest but don’t provide too many details about your personal life.
Offer the lowest settlement amount that you think the company would be willing to accept but don’t make it so low that it is unreasonable. Be prepared to increase the amount if the creditor won’t accept your original offer. As part of your offer, state that you want the company to mark your debt as “paid in full” rather than as being settled or only partially paid.
Request a letter from the creditor stating that the company will report your account as paid in full when you pay the agreed-upon settlement amount. The letter should include the negotiated settlement amount and the due date as well as a clear statement about what and when the creditor will report to the credit bureau. Don’t make a payment until you have this agreement in hand.
Make your payment as promised. Clearly mark on your check that it is “payment in full,” and include the account number on the check. While some states have laws regarding the validity of this, in many parts of the United States the fact that the creditor cashes the check means that the terms written on it have been accepted. This doesn’t necessarily affect any credit bureau reporting, however, and only works if there is an honest disagreement regarding the amount you owe.
- Bankrate: The Debt Advisor: Removing Charge-offs from a Credit Report
- Federal Trade Commission: Knee Deep in Debt
- Debtors Unite: Debt Settlement Pros and Cons
- Military Money: How to Negotiate a Payment Plan or Settlement With Creditors
- Debt Steps: Debt Settlement Tips
- The Sierra Sun: Jim Porter: The Check’s in the Mail
- Cornell University Law School: Uniform Commercial Code
- If you can’t get a creditor to mark your debt as “paid in full,” you may still be able to get it to mark it as “paid as agreed” or simply “paid.” If they won’t agree to that, request that the entire record of your history with that company be deleted from your credit report.
- Allow a few weeks for changes to take effect and to be reported, and then request a free copy of your credit report -- you are allowed one per year from each of the three credit reporting bureaus -- and verify that the creditor reported your debt as paid in full.
- Get everything in writing before you pay, since once the creditor has your money there is no need for the company to negotiate with you any further. If your debt has gone to a collection agency, request a statement in writing from the original creditor as well, to make sure all relevant information is included.