Does Collections Affect Your Credit Score?
What is the relationship between Collections and Credit Score?
It is also important to note that if you have any unpaid bills and collections, it has a way of affecting your credit score. Collections accounts on your credit report show that you were unable to pay a previous debt as per the agreed timelines. This makes lenders consider you a higher risk if you apply for new credit.
How Collections Impact Your Credit Score?
There are a few ways that collections accounts hurt your credit score.
Payment History The payment history contributes to 35% of your FICO credit score. When an account is taken to a collections agency, it simply implies that you have failed to make your agreed payments and you are in default of that particular obligation. This significantly hurts your record of timely payments.
Credit Utilization The second largest component of your credit score is your credit utilization rate – the total credit you owe compared to the total credit that you have available to you. If an account is placed in collections, your total credit debt increases; thereby increasing your credit utilization rate. Consequently, the situation where there is higher utilization will lead to the achievement of a lower score.
New Credit application accounts in the unpaid collections list may lead to debt collectors suing the person and recovering judgments against the individual. These judgments are also recorded in your credit report and act as a burden to your total score. Having more than one collection account also indicates risky behavior to potential lenders.
Account Status Collections accounts are closed accounts with negative status. This is because closed accounts in bad standing have a worse impact on your credit scores than open accounts in good standing. The closed status exacerbates the effects of the collections notation on the acquirer.
How much are collections bad for credit scores?
In general, collections are considered the worst type of negative information, which, on average, can bring a credit score down by 100-200 points. But the specific impact depends on your credit situation, including.
- Your initial credit score
- The dollar amount of the total collections
- New collections identified
- Number of collection accounts
- Age and status of the account for the collections
For instance, a $100 medical bill can seriously affect credit if reported for collections will affect less than the $10,000 credit card balance that one fails to pay.
And while a single new collection isn’t good, it won’t put you in the tank for credit if you have a long history of positive credit. On the other hand, if you already have many collection accounts, another one could lead to a huge blow.
The length of time that collections remain on a credit report depends on the type of credit information involved.
Unpaid collections are reported on the credit report for 7 years, starting from the date when the first account became delinquent and was never back to a positive status. This is the case, even if you pay a collection account in the future sometime. On the other hand, if you pay the past-due balance as soon as possible, it will not be so reported to the credit bureaus.
The timeline for paid collections works like this.
- Paid medical collections can be stayed for seven years from the time it was reported as paid.
- Hence, settled non-medical collections can be reported for seven years from the date the account first became delinquent – just like unpaid collections.
However, it is still problematic to pay off collections because the credit bureaus do not have to delete the info from your credit report immediately. This is because it still shows that at some point you missed a payment obligation by a large margin.
Managing Credit Collections: Some Guidelines
If you find yourself facing overdue debts in collections, here are a few tips to help limit additional credit score harm.
If possible, negotiate with your creditors directly. Pay all outstanding bills before their being closed out and before they end up with collection agencies. This looks better than seeing balances lie fallow.
Do not refuse to answer calls from collectors. Failure to seek out debt settlement chances in the initial stages results in accounts being in collections for longer. It is advisable to settle quickly even if the amount paid is less than the full installment.
Maintain all invoices proving that the debts have been settled and there are no balances forward if mistakes creep into the credit reports later on. Deny the allegations and counter with facts. It can force the credit bureaus to delete resolved collection accounts. If, by some chance, these accounts continue to provide false information in their reports, you might need to file a lawsuit to force their removal of outdated, invalid negative information.
Don’t apply for new credit until the negative items start falling off your credit reports. It affects credit worthiness of the applicant where they try to avoid opening more accounts due to many debts carried along. Do not get credit checks while rebuilding your credit over the next few years; instead, use debit cards or secured credit cards. You also need to monitor your credit to see how your score varies as the credit goes through the aging process in collections.
The main thing to remember here is that collections are tremendously damaging to your credit score in the short term. However, if you ensure that you are balancing your charge-offs and working on payment plans toward the freedom of having no debts on your record, ensure you are monitoring your credit reports filed carefully, and allow the negative items to drop off your record over time, your scores will begin to rebuild.
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