Does Debt Collector Affect Credit Score?

Does Debt Collector Affect Credit Score?

A credit score is a figure that ranges from 300 to 850, which helps credit companies understand whether you will pay the loan back. It is based on data in your credit file, such as your ability to pay bills and manage your credit obligations. If the credit score range of 700-850 is considered good, then this will help in getting loans and credit cards, renting an apartment, and other related things.

If you have some credit that you owe and you have not been able to pay as required, then the interest on the amount and the collection can reduce your score. In particular, if you have debts, they may be collected and this will be very negative for your credit. Here is a brief on how debt collectors can affect your credit report and score and what you can do about it.

Do Collection Agencies Inform Credit Reporting Agencies?

Most of the debt collection agencies are known to forward unpaid debts to one of the three major consumer credit bureaus which includes Equifax, Experian, and Transunion. This implies that any action about the debt in collections will be reflected in your credit report, which forms the basis of most determinants of credit score.

The Consumer Financial Protection Bureau issued a report that revealed that 50% of all the debt collection trade lines on credit reports are linked to medical debts. Some of the other types of debt that are usually placed in a register of debts and can easily go to default and collection include credit cards, personal loans, utilities, cell phone contacts, and so on.

How Debt Collectors Reduce Your Credit Ratings?

There are a few ways that having debt in collections hurts your credit score.

• Payment History: The credit scoring models are based on the past payment history to determine whether one has made the payment as agreed or not. If a debt is written off and sold to a collection agency, it gives others a clear indication that you have not made payments as agreed in the recent past. This is not cool as it can significantly bring your scores down.
• Credit Utilization: Outstanding debts owed to collection agencies raise your overall credit card balances. Having a high proportion compared to your total credit limits and loan amounts is considered a higher credit risk.
• Negative Marks: Collections accounts on your credit reports are therefore grouped under negative credit items. Most of these have been witnessed to hurt credit scores the earlier they appeared in one's credit report. In the same case where you have paid the collections balances, the collections trade lines remain in your credit reports for 7 years from the initial delinquency date.

While FICO and VantageScore credit scores are based on different algorithms, the effect of collections on these scores is somewhat different. However, according to a study conducted by FICO, individuals without any collections debt have average scores that are 20-25 points above those who have one or more collections accounts, and 45-65 points above those with multiple collections accounts.

The longer the unpaid collection amounts have been outstanding, the bigger the impact they will have on your scores. In general, scores are reduced significantly more by a collection that is less than 6-12 months old as compared to an older collection.

How to rebuild credit if you have debts in collections?

If you find yourself with some of the accounts sent to collections, it is also wise to work on them to minimize the impact and gradually rebuild credit. Here are some tips:

• Pay Off Collection Balances: Erasing unpaid debts is the fastest way to get yourself into a better credit status financially. Approach the agency holding the debt and tell them you wish to pay the debt but on an installment basis.
• Resolve Credit Reporting Errors: A large-scale survey of the FTC reveals that approximately twenty percent of credit reports contain major errors. This is why it is wise to check your credit reports from Equifax, Experian, and TransUnion at the website AnnualCreditReport.com, to contest any inaccurate, old, or misleading information that may be in there. Cleansing out invalid collections has an impact on making them better.
• Ask for Goodwill Deletions: It is possible to request creditors and collectors to delete the negative marks in their databases for good faith reasons. There is no legal requirement for them to do so, but they may agree to delete paid collections if you always meet your obligations concerning them.
• Improve Other Credit Factors: As not easy, one should endeavor to meet all the current loan and credit card repayments on time in the future. Ideally, credit utilization should not exceed 30% and, in principle, you should not open new credit accounts until your credit standing is more favorable. A good pay record has the potential to eradicate collection harm over time.

Contact Creditors Before Debt Collectors: If you begin to have problems paying the bills, the best thing to do is to talk to the creditors and explain your situation. They may have hardship programs or are willing to make some other arrangements which is better than closing accounts and sending them to collections. This helps to avoid negatively affecting credit scores.

The Bottom Line

Having amounts in collections significantly reduces credit scores and reduces the ability to borrow funds at reasonable interest rates. Erasing old collections balances and debts that defaulted quickly brings credit scores to typical levels over time. Maintaining the same levels of responsibility in managing your current liabilities is also a sign of sound financial behavior that can counterbalance past problems.

It is important to prevent credit harm once debts remain unpaid and this is done proactively. Pay attention to your credit reports and actively manage any active collections or mistakes that are on your credit reports to start fixing and building your credit back up from there. Credit lies in being reasonable when it comes to handling credit; it becomes easier to obtain what one wants in the future.

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