How Debts in Collection can Affect Your Credit

debt and collections

You probably know the importance of repaying your debts on time and in full. Not doing so can result in all kinds of consequences, including late fees, higher interest rates, a low credit score, and worse. Instead, it’s important to build a solid payment history, especially if you want to apply for more credit or a loan.

But what if you don’t pay a debt or a bill and your account ends up in collections?

Many people are in the same boat. Approximately 30 million Americans have at least one debt in collections. It sounds like a high number, but some of that debt includes things like disputes over bills or charges that were mistakenly overlooked. What may be a legitimate dispute or an innocent mistake can end up hurting your credit. That’s because once a debt reaches the collections stage, the damage is done and repairing your credit becomes much harder.

Let’s discuss how a debt in collections impacts your credit and what you can do about it.

How debt collection works

When you don’t pay your debt for at least 60 days, many companies will turn your account over to debt collection. It then becomes the debt collector’s job to try to get payment from you.

Debt collectors are known for their persistent tactics, which can include frequent phone calls and letters. Persistence pays off in a debt collector’s world because the more debt they can recover, the more they will be paid.

While it can be very stressful to be on the receiving end of a debt collector’s attention, there are some rules they have to follow. Reputable debt collectors and collection agencies will take care to follow consumer protection laws around when and how often they can attempt to contact you. They will also do their best to verify the debt is actually yours and that it’s still within the statute of limitations. If the debt is a mistake or was caused by identity theft, and therefore can’t be verified, the collector will stop asking for payment. The collector may also ask that the unverified debt and subsequent collection be removed from your credit report.

The best way to work with a debt collector is to come up with a repayment plan. You may not be able to pay your debt in full right away, but many debt collectors will agree to monthly payments over a set period of time. In some cases, the collector may even settle the debt with you, meaning they may cancel a portion of your debt in exchange for a percentage of repayment.

How debt collection affects your credit

The unfortunate reality of an account in collections is that it will be noted on your credit report and it’s a major red flag to the credit bureaus. Not paying a bill or a debt can indicate you may be irresponsible with your finances or at risk for defaulting on future credit and loans.

Once a collection ends up on your credit report, your credit score can drop severely. How much your score drops is dependent on how recent the collection is and what your score was before the collection, among other factors.

Also, a collection does not go away after you start to make payments again. Negative information remains on your credit report for seven years. Plus, an additional 180 days from the date your account became delinquent gets added if your account was charged off before going to collections.

The negative impact of the collection will lessen over time. After seven years, it drops off your report entirely, even if the debt was never repaid. However, repaying your debt and building good credit again is still important.

How to improve your credit after a collection

Seven years can seem like a long time, but you can improve your credit in the interim with patience and a few key guidelines.

  • Pay the balance. It’s always better to pay back the debt in full than to have an unpaid balance on your credit report. If necessary, set up a payment plan to get to a zero balance as quickly as you can.
  • Avoid debt settlement if possible. Like charge-offs and collections, a settlement reflects negatively on your credit report. If the goal is to improve your credit, a settlement isn’t the best option. Rather, it should be a last resort if you’re not able to pay the debt in full but still want to resolve the collection.
  • Keep up with your other payments. Since payment history accounts for 35 percent of your credit score, it’s critical to make all your other payments as expected. Falling behind on other bills and debts will only dig you deeper into a financial hole. And having multiple accounts in collection will not do your credit score any favors.
  • Advocate on your behalf. Try negotiating with your creditor to have the account removed from collections in exchange for payment. It doesn’t always work, but it’s worth a try, especially if you’re trying to get a loan or some other form of credit.

Keep an eye on your credit report

Sometimes a collection may show up on your credit report when it shouldn’t. For example, if the debt was reported by you or the debt collector as a mistake, the collection may not get removed right away. Errors and inaccuracies on your credit report can be very costly and do further damage to your credit score — often without your knowledge.

It’s important to check your credit report at least once a year, especially if you’re concerned about old information. If you do notice an old collection that needs to be removed, you’ll need to dispute your credit report. Professional credit repair experts can help you address the error with the credit bureaus.

No matter what, paying your debts as expected will help you avoid a multitude of headaches. But if you do end up with a debt in collections, take steps to repay the debt in full and to work with either your creditor or debt collector to resolve the issue.

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