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3 Common Debt Collection Myths

If you worry about how you are going to pay down large sums of debt, you are not alone. Millions of Americans are unsure how their debt impacts their overall finances, their credit report, and their future. Don't let it get to you. The key to overcoming debt is to drill down and put a debt management plan in place.

A big part of putting your worries to rest is taking action. Order a copy of your credit report, so you can analyze your complete debt load. Take a look at your current debts: credit cards, mortgages, student loans, auto loans and any others. While all debts must be repaid, debts secured by an asset, such as your home or car, are considered more favorably than credit card debt, for instance. Keep this in mind when focusing on your repayment plan.

Once you know exactly how much you owe, create a monthly budget that factors in your debt repayments. Start thinking about how you will prioritize your debt repayment. Perhaps you want to first pay off credit cards with the highest interest rate.

Next, find areas you can afford to cut down on, such as unnecessary cable or cell phone packages, and work to optimize the amount you put toward paying down your balances. Making more than the minimum payment on credit card bills is essential. You will have to decide if you want to spread the wealth or focus strictly on getting rid of one debt as quickly as possible. As your debt balances decline, lenders will view your credit report more favorably and your credit score will likely improve.

At some point along the way it may feel like you're going at a slow pace. Keep in mind that paying down debt takes a long time, but your efforts are important. If you are seeking to track your progress, try credit monitoring. You will  receive updates to your email or mobile device upon changes to your credit score.

Dealing with debt collection agencies can be an unsettling experience, largely because it is unfamiliar territory. People may feel ashamed or humiliated for their mistakes and misunderstand the way debt collection works.

Debunking some common debt collection myths may help you make informed decisions while you get your credit score back on track.

Myth #1: When I pay off a debt in collections it is removed from my credit report

Debts that are sent to collections remain on your report for a period of seven years, regardless of whether they are paid or unpaid. The history on your account payment is also recorded, including any delinquencies over the years.

When you pay the total balance owed, the status of the collection account will be updated to paid status, however, both the original and collection accounts will remain on your credit report until seven years since the date of the original delinquency.

Myth #2: Only large balances are sent to debt collectors

There is no minimum amount for a debt to be passed on to collections.  Even an unpaid parking ticket for twenty dollars can be escalated, so no matter how small the bill, it’s best to pay it.

Myth #3: The collection amount will be the same as the original balance

When lenders sell your debt to a collection agency the balance listed on your credit report may increase, because the debt continues to accrue interest and other fees. As a result, the total amount listed on a collections account may be greater than that on the original account.

Unpaid debts that are sent to collection agencies can lower your credit score, making it more difficult or costly to obtain financing. If you are trying to repay a debt that’s been sent to a collection agency, the important thing is to improve your behavior over time.

Lenders will not only look to see that you have repaid your debt and made good on the account, but that you have sustained a good payment record – indicating that you have overcome any past financial hardships and are equipped to manage your debts responsibly.

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