How to Pay Off a Derogatory Debt

A derogatory debt is a bill or loan you failed to pay. The creditor or debt collector still expects payment and may list the account on credit reports as a charge-off or collection account. Some people engaging in credit repair start by reviewing their credit reports for derogatory debts. Their intent is to increase their credit score by paying the derogatory items while making timely payments on current bills. Paying derogatory debts may not immediately improve your credit, but it does show future creditors that you are resolving old credit problems.

Instructions

1

Get a copy of your credit report from AnnualCreditReport.com. The website issues free credit reports under the terms of the Fair Credit Reporting Act. It's only site endorsed by the Federal Trade Commission as a source for completely free reports.

2

Read the report to identify derogatory debts. Look for charge-offs, collection accounts and court judgments. A charge-off is an account the creditor closed after you stopped making payments. A collection account is a charged-off account assigned to a debt collector. Court judgments are court orders requiring you to pay money to a debt collector or creditor for an unpaid debt.

3

Get a contact number from the credit report for the creditors or debt collectors on derogatory items.

4

Rank the derogatory items from the lowest balance to the highest. Pay them one at a time as your budget allows. Call the first debt collector with the lowest balance and indicate that you wish to settle the debt for 20 percent of the balance. Paying the debt in full isn't going to significantly improve your credit score, so you should pay as little as possible to resolve the delinquency.

5

Negotiate with the debt collector if the agency will not accept 20 percent. Gradually increase your offer but do not exceed 50 percent. Move on to the next debt if the debt collector will not accept 50 percent. Offer the next debt collector 20 percent as you begin a new round of negotiations. Continue calling through your list until you have a deal.

6

Get terms of agreements in writing before paying by cashier's check. Ask that the debt collector specify in writing that upon receipt of your cashier's check the debt collector will consider the account paid. The debt collector must also agree to update records on your credit report to show the account as "settled" or "settled for less than the full balance." Also, the debt collector should list charge-offs as "paid charge-offs" and judgments as "paid judgments."