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How to Deal with Collection Agencies

Collection agencies are not the nicest people to encounter. They can be intimidating, rude and unfriendly. If you’ve dealt with them before, you are well aware of this. If you are not familiar – collection agencies are companies who try to get overdue debt paid.

How does it work?

When a consumer is overdue on a debt (typically 180+ days), the creditor will write it off as “bad debt”.

But first – USING CREDIT CARDS DOES NOT MEAN YOU HAVE DEBT! Okay, let’s continue.

1. Do I need to use credit cards to have good credit?

Short answer, yes! And this is because of the makeup of our credit score. Our credit score is based off 5 areas: Credit Utilization, Payment History, Length of Credit, Mix of Credit, and Inquiries. For this blog, I’ll focus on the biggest areas:

Credit Utilization, 30% of your score: Credit Utilization is based on how you use your credit cards. Think about it. Without credit cards, how many points do you think you are getting here? I’ll wait.

The credit score range is 300-850, 30% of that is 165 points. So, not having credit cards costs you at least 165 points. When you do have credit cards and use them correctly, you are very well able to receive all the 165 points in the Credit Utilization category. To do this, you just want to make sure that your balances are not over 5-7% of your limit. For example, you have 2 credit cards. One has a limit of $5,000 and one has a limit of $300. You have a balance of $65 on one card and $200 on the other. This is how you determine your Credit Utilization:

Add up Credit Limits: $5,300

Add up Balances: $265

Divide the balances by the credit limits: $265 divided by $5,300.

Multiply that by 100. This is your Credit Utilization Percentage. In this case it’s 5% which is perfect, and you are then maximizing the points possible in this area.

Payment History, 35% of your score: Payment history here refers to the accounts that are on your credit report that have a monthly payment. Student Loans, Mortgage, Auto Loan, and Credit Cards are an example. Simply having a credit card and making on time payments over and over will continue to build 35% of your credit score.

2. Why do we need to use credit cards to have good credit?

I got ahead of myself already, see long answer to question #1 above. Haha. Or just take the answer – “because I said so.” 😊

3. Why do we need to have debt to have good credit?

Again, – USING CREDIT CARDS DOES NOT MEAN YOU HAVE DEBT! Using credit cards beyond your means, can lead to debt. Credit cards are great for investment purchases, temporary loans, emergencies, etc; other than that, you should not be carrying a balance on your credit cards. The banks give you a minimum payment, but that means nothing. Pay your credit card in full EVERY MONTH to avoid debt.


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