Don't ever make a payment on a bad debt once it has hit your credit report as a negative tradeline. This will update the DOLA in most states and actually cause the debt to linger around hurting your credit for even longer.
Having good credit will give anyone a leg up in any economy. With good credit you will pay lower interest rates on purchases, be approved for loans you need in an emergency, and avoid the headache and frustration of being a "bad credit buyer". There are many companies that claim to "fix" your credit that will do nothing but rip you off. You are far better off working on your credit yourself and taking advantage of the laws available to protect you.
Pull copies of your Transunion, Equifax, and Experian reports. You get one free credit report per year (two if you live in Georgia). It is necessary to get all three reports. Information will vary on each of the reports and you need to know exactly what you are trying to dispute and to whom.
Identify the debt. Was this for an old unpaid credit card? Was it for a payday loan gone bad? How old is the debt? Make sure that you know exactly what the debt was for before you begin to fight it. This give you a distinct advantage. Don't expect any collection agency to be honest with you about the date of the debt--it is in their best interest to keep that information hidden from you or even lie about it.
Check your state's Statute of Limitations. Each state has a statute of limitations for which collection activity can legally continue for a debt. All credit cards are considered "open" accounts. Google your state and "debt statute of limitations". Most states fall into the 3-5 year range. If your debt is still legally inside of statute its best to not ruffle any feathers with a collection agency until your debt ages out.
Send a Dispute and Validation letter to the collection agency that is currently holding the debt. This is commonly known as a D&V letter. While you can get many templates on the internet, you should tailor your letter to your own needs. Your first DV does not need to be threatening or rude, sending it is merely a formality. You want to create a paper trail to prove to the Credit Reporting Agencies that you attempted to investigate. Send your letter Certified Return Receipt Requested and save the green card!
Also make sure that you send a limited Cease and Desist letter if you haven't already. This is merely a letter that prohibits the collection agency from calling you on the telephone. Do NOT send a full C&D letter because this will prohibit them from contacting you in any medium. They can use this as an excuse for not responding to your DV letter. Keep copies of everything you send and send everything CRRR.
Don't sign anything. Many people have been horrified to discover that when they signed their name to letters to collection agencies those signatures have mysterious "jumped" to other documents agreeing to pay, acknowledging the debt, etc. A simple typed letter with your name typed at the bottom is always sufficient.
Wait. After 30 days one of two things will have happened. 1.) You will receive no response whatsoever (this is the most likely scenario) or 2.) the Collection Agency will send you a printout of what you supposedly owe. A printout of how much money they want from you is NOT validation of your debt. If they cannot prove to you beyond a shadow of a doubt that the debt is yours its time to contact the Credit Reporting Agencies.
Call the Credit Reporting Agencies. Tell them that you pulled your credit report and found a nasty tradeline on it and you have no idea where it came from. Let them know you contacted the collection agency but they either cannot tell you anything or just tell you that you should pay it. Be distraught. Ask them what you should do (even though you'll know what to do, you want to appear innocent and upset). They will agree to investigate. Thank them.
Next, put in a dispute online. Do this right after calling them. Each CRA has a section on its website for online disputes.
Mail each CRA copies of their company's credit report with the bad tradeline highlighted along with a letter detailing all of the action you have taken to attempt to gather information on the debt. Include copies of the green cards that prove that the collection agency received your correspondance. Be insistent that this be investigated immediately. Do not deny that the debt is yours. Merely state that you don't recognize the debt.
Wait. Each CRA is required to notify you of the results of their investigations. With any luck, your negative tradeline will be removed. If not, you may have to do a bit more work.
Send another letter, CRRR, to the collection agency. Let them know that you either did not receive a response to the last letter you sent or that the response you did receive did not give you any information about the debt. You may be demanding. Let them know that if they cannot give you information proving that the debt is yours they are required by law to remove it. Also make it clear that you have no qualms about filing formal complaints to the Federal Trade Commission and the Attorney General's office. Give them a time limit (10 days is sufficient) in which to remove the tradeline.
If after 10 days the tradeline remains, contact the CRAs armed with the same information. Let them know that it is their responsbility to accurately investigate consumer claims and that you do not want to be the person that slips through the cracks. This time you should call and write a letter but do not file online. You don't want your disputes marked "frivolous". Be nice on the telephone, but upset. Make it clear that you are calling to ask for their help with a matter that is outside of your control. You do not have to be nice in your letter, however. Feel free to threaten to contact your state's Attorney General if the matter is not resolved.
Wait. Once it is clear that you are dead serious either the collection agency or the CRAs will remove the tradeline. If they do not, make good on your threat to contact your Attorney General. The AG is there to help you and many people have seen wonderful results after contacting their AG. This probably will not be necessary.
Pick apart the tradeline for any inaccuracy, no matter how small. Is the date of last activity wrong? Do they have the wrong Social Security Number? Does this company have no record of ever having had you as a client? Look for the smallest shred of misinformation and, once again writing to the CRAs, ask that the tradeline be removed for being "inaccurate". It is illegal to knowingly leave inaccurate information on a person's credit file.
If all else fails, check the date on the debt. The Date of Last Activity is the date the account first went delinquent plus 180 days. A negative tradeline is not supposed to remain on your report for more than 7 years past that time. You can easily wait out a debt. The older a debt is, the less it affects your credit score. The DOLA is the number that is most often fudged by collection agencies. You will often see a debt that you know for a fact is over 5 years old being reported as being a recent debt. These are the small inaccuracies you can report to the CRAs and use to fight the debt away.