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Death of a Credit Card Balance, Part 3


How to make collection agencies work to your advantage.

Editor's Note: This is part 3 in a multi-part series about paying off credit card debt and dealing with collection agencies. Read part 1 here and part 2 here.

If your account has gone to an outside collection agency, in most cases it means you may have:

A. Not made a payment on your account within 90 days.

B. Not answered your phone when the company or the collection agency called.

C. Not come to acceptable terms with the company in question.

D. Not fulfilled a collection agreement with the internal collection department of the company in question.

E. Some or all of the above.

On a scale of 1 to 10 of how bad things have gotten, it ranks somewhere between a 6.5 and 8 -- where 10 is the worst. How you handle it from here can keep it from going to a 9 or 10.

Four Important "Must-Knows":

1. KNOW the differences in credit account TYPES. At American Express (AXP), the card you don't leave home without is most likely a charge card, of the green, gold, or platinum variety. Credit limits are fluid and depend on your "ability to pay" based on income and past track record.

Banks, such as Capital One (COF) and Citibank (C), usually issue credit cards with introductory interest rates and a pre-determined credit limit.

Charge cards are due in full every month while credit cards are "revolving" and have minimum payments and interest due each month.

Lines of credit can be either "secured" (with corresponding collateral, like a house) or "unsecured" (which are based on your personal guarantee that they will be repaid).

Knowing this is important because of how collection agencies look at the "type" of debt they're trying to collect -- it impacts the offers they're able to make to you.

2. KNOW when your accounts will report to the credit bureaus. Not every company reports a missed payment at 30 days late, although most do. Find out what the reporting procedures are from each of your accounts.

Store accounts, like Macy's (M) or J.C. Penney (JCP), report like clockwork for every missed payment. Too many 30-day hits on cards like these are extremely detrimental when it comes to your credit report, especially within a three-year period.

This is important because if you're in a financial bind, and are faced with making a decision between paying Card A or paying Card B, you need to consider who's going to report what, and when.

3. KNOW that each missed payment has its own aging cycle, but missing critical due dates can affect the whole balance.

For example, let's say you have a Capital One card and a $9,000 balance. Maybe your minimum payment this month (depending on your interest rate) is $340. You miss your payment, and you're past the 30-day mark. You now have another $360 payment that's due. This is a total of $700 due, but part of it is in a "bucket" that's 30 days late and heading toward 60 days late.

Each payment (bucket) ages on its own cycle, and each month you go without paying, a new bucket begins its journey toward delinquency.

This is important because the minute the most delinquent payment hits 91 days late, it will move to an outside collection agency -- but here's the thing: The whole account is reported delinquent, not just the part that's late. The same is true when you're getting close to 180 days late.

4. KNOW that 90 days is a magic number when it comes to late payments. Exceed it and your credit will have its first serious mark against it. (30 days and 60 days are merely blemishes that can be rectified when payments are made -- providing late payments don't become habitual).

This is important because at this benchmark, the company will bring out the "big guns" and hand your account over to a more aggressive collection department, either internally or by employing an outside agency.
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