Credit scores are critical for your finances. Besides helping you access mortgages, loans, or higher credit card limits, they can also help you get employed. To this end, many of us work to improve our scores to the greatest extent possible.
Indeed, when you see a collection account on your credit report, you know your score will suffer. Those accounts appear when collection agencies report any outstanding debts to Experian, Equifax, or Transunion, usually with devastating effects.
Ignoring the situation won’t help you improve your score, nor will paying off collections alone. If you want to eliminate an old debt from your credit report, you need to take action. Several methods can help you prevent collection accounts from hurting your credit score. Keep reading to discover how.
What Is a Collection Account?
If you default on a loan, lenders may transfer or sell your account to collections. This step usually comes a few months after you become delinquent. Or, you can undergo debt collection on the date you stopped paying the full minimum payment.
Typically, creditors will call you or send you letters about the debt before sending it to a collection agency. Yet, you may not know when your accounts got sold to a debt buyer. Soon after, the collection agency will attempt to collect the funds from you.
Even if your obligations get sold to a debt buyer or placed for collection with a collection agency, you must still settle them. Meaning, you will pay the collection agency instead of the original creditor.
How Do Collections Work?
Debt collection varies depending on the company managing your loan. Some agencies deal with medical or student loan debts only. Others deal with past debts that are a few years old. Also, a collector will usually come after old obligations that are a few months past due and indefinitely after that. The process depends on the collecting companies, the amount owed, and the loan type.
If you have outstanding debt, you’ll receive alerts through the original firm. If the lender cannot get you to pay what you owe, the attempts will stop. At this point, your account transfers to the debt collector.
Collection agencies will then use your information to contact you. Even worse, if you don’t turn in their calls, they may reach out to your relatives. Sometimes, debt collectors use personal banking information, such as savings and investment accounts. They do so to check if you have the necessary funds to repay your loan. Note that wage garnishment to collect old debts is legal in some states.
How Is Your Credit Score Affected by a Collection Account?
An unpaid debt in collections will have a significant impact on your score. First, when a collection hits your report, it can lower your credit score by as much as 110 points. Meaning, a fair score can quickly fall within the poor range. Overall, expect your credit score to lose many points.
Second, collections tell potential lenders that you failed to repay and that you are a risky consumer. Your creditor will be reporting your accounts to the bureaus, thus causing a drop in your credit score. The worst part is that collections can stay on your credit report for up to seven years. Once this time is up, the delinquent account should drop off your credit report.
Finally, collections will have a lower impact on borrowers with lower scores and other negatives. Yet, FICO algorithms are complex, and details of the procedure are pretty secretive. Therefore, it’s best to run a what-if simulation if you want to find out the facts of your case.
Will a Medical Collection Affect My Credit Score?
The current FICO algorithm equals medical collections with any other type of collection. Indeed, any collection will affect your credit score in the same way. Many argue that medical debt should be separate from different kinds of debt since it’s beyond our control, but that’s not the case. The good news is that some credit scoring models may ignore collections for smaller amounts up to $100.
Medical collections can drop your score by more than 100 points and stay on reports for seven years. Sometimes, medical debt may get subtracted from your DTI ratio when you are getting a mortgage. Yet, this criterion is different and is unrelated to FICO scores.
How Can You Avoid Collections From Damaging Your Credit Score?
When you settle a collection, which reflects the zero balance on your report, your FICO score may improve. However, scores generated by older models may not improve as they also consider paid collections. Meaning, even if you settle your collections, your score may get damaged. Hence, it’s vital to see how it impacts your credit history by pulling a free credit report.
Luckily, there are ways to avoid damaging your score and raise it within a short timeframe. The best thing you can do is have the collections removed. By doing so, you’ll avoid collection lawsuits, dodge interest rates, and eventually boost your FICO score.
A payment that is a month or two days late won’t affect your credit score as much as a payment that’s three months past due. Also, while paying collection accounts won’t automatically boost your credit score, the debt will have less impact as it ages. So, if you fall behind with your obligations, consider catching up on payments to avoid collections.
Moreover, it’s worthwhile to engage in credit repair. Try removing negative items from your report as quickly as possible, whether by yourself or through a credit repair company.
Will Removing a Collection Account Increase My Credit Score?
Since paying off a collection won’t automatically boost your score, you must get the collections removed from your credit report. The best approach is to contact the agency and offer to settle your obligation in return for deleting the collection from your report. Not every collector will agree to do so, as this practice can damage their reputation with the bureaus. Yet, many will decide to recoup the money owed by helping you out.
Let’s now address the issue of how many points credit scores can go up after removing collections. The truth is, there’s no one-fits-all answer, as this will depend on how much the collection impacts your account. If the collection deprived your score of 100 points, getting it deleted should increase your score by the exact points.
Indeed, it’s nearly impossible to tell a specific number since every report is unique. So if you’re facing financial consequences, consider getting support from a credit repair expert. Our team can guide you through the process of cleaning up your credit report.
Are Charge-Offs as Bad as Collections?
If you don’t make your payments in 180 days, a creditor will deem you can’t pay what you owe. Hence, they will take steps to charge off your delinquent accounts. Charge-offs are harmful entries that remain on your report for seven years.
Following the charge-off, creditors send your payment to third-party debt collectors. In some cases, original creditors further own the account but assign it to a third party for collection. Here, only the initial charge off with the balance will get reported.
If your creditor sells the debt, a new collection account will report to your credit file. Meaning, you will face two negative items on the same default: a charge-off with zero balance and a collection with a balance. These items take a toll on your score.
Consider settling with the initial creditor before your debt gets sold and collection accounts show up. Prompt payment may also stop further account updates, and the charge-off will age. The severity of the delinquency and the amount of money due will define the effect on your credit report.
Overall, a credit score in the 700s will suffer well over 100 points by the first collection. However, describing how many points your score will drop due to a charge-off or a collection is quite complex. In short, the FICO procedure considers many factors, and each case is different.
How to Remove a Collection Account From Credit Score
To begin, keep track of collection accounts by getting all your credit reports. Then, learn if you got reported to one or two credit bureaus. Also, ensure you can get a free credit report every year from each major credit reporting agency, namely Experian, TransUnion, and Equifax. This way, you can work on other factors to boost your score while getting paid collections off your credit file.
Typically, there are three ways to remove collections off your account described below:
If you have a good credit history with an isolated negative item, write a goodwill letter to the original creditor. In your request, ask them to remove the negative items from your report out of goodwill. If you’re a loyal and reliable client, most creditors will agree to support you.
This strategy could prove successful if your financial history is promising. In your letter, specify how long you have kept an account with the lender. Also, claim you intend to keep it in good standing and that your late payment is a one-time error. Then, ask for a line item revision on your credit reports as a gesture of goodwill or for compensation.
Having settled your obligations and demonstrated you’re not a risky borrower, lenders might show some goodwill. Or, at least, report your past undoing less negatively. If you negotiate a deal, get the agreement in writing to prove that the collector agreed to perform the deletion.
Yet, some may state they are unable to remove the negative information. To a certain extent, this is true. Therefore, credit reporting agencies ban such activities and urge credit reports to reflect the consumer’s creditworthiness accurately.
Pay for Deletion
Lenders may be willing to remove collection accounts if you are a trusted negotiator. A pay for delete letter is a valuable tool to have negative marks removed in exchange for payment.
In short, the collection agency in charge of collecting payments for the original creditor receives compensation for doing so. So, if you want your letter to be an incentive, offer an amount greater than that percentage.
In the request, include relevant information such as dates, payment amounts, and negotiation terms. Your letter should be clear, well-written, and concise. In case you have no prior experience with the procedure, look for templates online. Once you succeed in your intentions, ensure you get the creditor’s agreement in writing.
Finally, not all creditors will accept ‘Pay for deletion’ letters. Larger financial institutions and creditors are not open to negotiation. Still, small utility bills that end up in collection may be more receptive to this strategy.
Dispute the Collection
Dispute any inaccurate or unsubstantiated item you may find on your credit reports. The credit bureau or collection agency should handle investigating the errors. If they cannot verify your account, you could get entitled to remove the negative item from your report.
Look for tiny errors in dates, names, and balances owed to boost your chances of winning the dispute. Then, in your letter, inquire that the collection agency validates that the unpaid debt belongs to you. If they can’t verify, request the delinquent account to get removed from your credit report.
In some cases, you will have to call a professional as disputing negative items is a demanding process. Sometimes, it’s best to seek the guidance of a professional credit repair company. Last, always keep copies of your disputes and ask for a response from the collection agency within 30 days.
How Long Does It Take to Remove a Paid Collection From Your Credit Report?
The FCRA states that delinquent accounts reported by creditors can stay on your report for up to seven and a half years, starting from the initial date you became delinquent. Unless you win a dispute over an inaccurate or unverified account, a paid collection will stay on your reports for the maximum period.
Overall, the longer your payments are due, the more they’ll affect your credit today. So, if you have late payments, catch up to avoid collections that will harm your credit file for many years.
Dealing with overdue debt can be challenging, and you may feel like investing all your energy to get out of it. In this situation, a settlement arrangement could resolve your financial worries. For the creditor, arranging to pay some outstanding debt is way better than reporting and getting none. For you, debt settlements will leave a mark on your report but can let you rebuild your score faster.
Anyways, consider the option of not settling your debt, too. If you fail to pay, your score won’t get hurt right away. Still, defaults will lead to continued late payments, fees, and credit agency collection attempts. Such scenarios can affect your credit score poorly in the long run. Hence, timely debt relief is always the best option if you want to have a clean slate.