Does Debt Collection Affect Credit Score?

How Does Debt Collection Affect Your Credit Rating?

Owing to this, if you have unpaid bills forwarded to a collection agency, this also reduces your score. Nevertheless, not all types of debt collection are equally detrimental to your credit. Your credit reports and scores are maintained by the three major credit bureaus: Experian, Equifax, and TransUnion. These bureaus get reports from lenders, creditors, and collection agencies on your payment record and balances. In this article, the reader will learn how various forms of collections may appear and impact credit rating.

Who Reports The unpaid Debts to the Credit Bureaus?

This implies that your account will be considered delinquent should you neglect to pay a creditor their due first-hand. Usually 90 to 180 days without payment, and after some time the original creditor chooses to give up and hand the account to a third-party debt collecting firm. After that, the agency would attempt to get their money back from you via letters, calls, etc.

Either the debt collecting agency or the original creditor may notify the credit bureaus specifics of the unpaid obligation. One of the worst things that may happen to your credit ratings is any account sold to a collection agency.

How Collections Impact Your Credit Reports and Ratings?

The major pieces of information that the credit bureaus collect on collections accounts are.

The name of the debt collector and collection agency
When the account was handed over to a collection agency
Balance owed
The amount that should be paid or not paid when they are in the collection.

If a balance goes to a collections agency that means it is very seriously past due. This will appear in your payment history section in your credit report and thus negatively affect your credit score. Collection accounts can remain on your credit report for up to seven years from the date that the debt was placed with a collection agency. In addition to this, if you manage to pay the amount that is owed in the collection account, the credit bureaus may keep the account in your credit reports but with notations indicating that payment has been made.

In terms of scoring impact, FICO treats collections accounts differently based on the type and size of the debt.

Scoring excludes medical collections below $500. Other types still count.
FICO also excludes non-medical collections that amount to $100 and below.
If a collection debt gets to be over $1000 this may mean a reduction in the credit score anywhere between 100-150 points.

It is also important to note that the more recent the collection account is, the greater the effect it usually has in reducing your credit score as well.

How Paying Collections Impact Your Credit Rating?

This means that, even if you could make partial payments for the collection accounts, it would still be beneficial because it provides evidence that you are willing to pay for your debts. However, it will NOT delete the entire negative collection entry from your credit reports. The balance may change to reflect your payments. However, the collection notation will persist to appear for an additional 7 years. The debt cannot just be ‘wiped off the slate’.

On the positive side, paying an account in collections in full could also be the way to go since it can lead to an increase in your credit score in the future. It just halts the process of bleeding to at least a very minimal level. The older the collection gets without further delinquencies, the less it impacts on the credit score. If you have paid off multiple collections accounts it can get you a 25 to 45-point FICO score boost within a few months.

Management of Debt Collection Effects

If some of your accounts go astray into the realm of serious delinquency and collections, this is a red flag that you should reign in your spending. Besides making payments, here are some other strategies that may help soften the blow collections make to your credit.

Do not pay the amount in full or directly to the collection agency; instead, pay the amount directly to the original creditor. Negotiate for lenient payment schedules or they can pay less than the amount they owe. This prevents the involvement of the collection agency in the first place.
If you do not agree with the information presented in the credit reports then you have the right to challenge it. If there are mistakes you believe are lowering your score, then it is time to avoid them to rectify them.
New positive credit if possible – this can be done through paying other accounts on time, or by applying for new credit and handling it appropriately. There are other ways to mitigate the effects of collection on credit scores; one of them is increasing the general credit score.
Wait it out. In credit scoring, paid and unpaid debts have equal impacts as long as they are recent. However, this impact will diminish gradually in the future provided you keep on maintaining other credit accounts responsibly.

The Bottom Line

With debts in collection, your credit score will plummet but it will not be the end of the world as you may think. Reducing balances, settling with creditors, and just waiting for the negative information to drop off can all mitigate losses. However, the ability to avoid accounts from getting into delinquent status in the first place should always be the preferred way to keep a credit score high.

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