Rebuild Your Credit After a Collection or Charge-Off

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Two of the worst types of account delinquencies are a debt collection and charge-off, both of which are the result of not paying a bill for several months. Because they show a serious late payment (which is 35% of your credit score), charge-offs and debt collections are terrible for your credit score. You might also have a hard time getting new credit applications approved as long as there's a charge-off or collection on your credit report. Fortunately, with some effort, you can overcome the damage done to your credit.

Dispute Wrongly Reported Collections or Charge-Offs

If you have a collection or charge-off that's not yours or that's not reported correctly, you can dispute the error with the credit bureaus.

To dispute a credit report error, write a credit report dispute letter explaining why the account is inaccurate. Include a copy of any proof you have to help the credit bureau with their investigation. If the error isn't deleted after you dispute with the credit bureau, you can dispute the account directly with the business that listed it on your credit report.

The credit bureau has up to 45 days to investigate your dispute and update your credit report. If your credit report isn't updated, they must tell you why.

You're allowed to sue a credit bureau that doesn't remove disputed errors from your credit report. Hopefully, you won't have to go this route, but save copies of everything related to your dispute in case you have to take legal action.

Get a $0 Balance

Here’s the thing: paying off a charge-off or collection balance won’t delete the item from your credit report and it won’t help your credit score right away. Once the blemish is there, the damage is done at least for the short-term. However, a paid balance is always better than an unpaid one, especially if you’re trying to get 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.

Settling a debt means the creditor or collector agrees to accept a smaller payment in lieu of the full balance.

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.

Try Sending a Goodwill Letter

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.

Keep Paying Your Other Credit Cards and Loans on Time

The best way to rebuild your credit after a mistake like a collection or a 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.

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 the 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

Little by little, your credit score will improve as you use your credit cards and pay on time every month. You can watch your credit score progress by using a free credit scoring service like Credit Karma or Credit Sesame. Be patient. You can wreck your credit score overnight, but you can’t rebuild it in as little time.