Q: I have a question about a loan that turned into a collection account in 2009. This loan had an adjustable interest rate, and my monthly payment went from $300 to almost $600 over the course of about 6 months. I called and tried to work with them to lower my monthly payment, since it had become unaffordable for me. They would not work with me, and my payment continued to increase, until I finally defaulted on the loan.
The company then contacted me to set up a repayment plan, and I ended up with a monthly payment of $300—the same payment I had requested and was refused. I have been making that payment on time ever since.
I ran my credit report and was surprised to learn that, even though I am current on my payments, the status of my account is a “charge-off,” and the report says I am past due for the entire balance. I disputed this, saying that we had agreed on a monthly payment; but the status of the account remains unchanged. It appears as though I defaulted and am no longer paying on the loan.
How is it benefiting me to make my payments if it still shows as a charged-off account? Am I just wasting my money paying them every month to get the same result as if I didn’t pay them at all?
A: The truth is you are in default on your original debt agreement. You are not paying as agreed, even though you believe the deal was dreadful. Before you agreed to the $300 payment, you should have gotten your creditor to agree—in writing—to the new payment amount. Additionally, you could have asked (also in writing) that the creditor report you as current.
But since that didn’t happen, there is still benefit to making the payments on the debt. If you default again, the creditor could take you to court and get a judgment, allowing them to pull money out of your bank account or garnish your wages. That would further damage your credit history. And, you would lose control of your own money. So, your new payment agreement helps avoid a court action against you.
There is an eventual upside. Your credit has already been damaged by this one debt. Negative information stays on your credit reports for seven years. However, the closer you get to hitting that seven-year mark, you will begin to see your credit rating improve if you stay current on all your bills. So, each year you get further away from the charge-off, the less impact it will have on your credit history.