How debts in collections affect your credit

Thoughtful young woman looks at papers to learn how debts in collections affect credit scores. Image: Thoughtful young woman looks at papers to learn how debts in collections affect credit scores.

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If you have neglected paying your bills, or a creditor’s records mistakenly indicate that you have, you may have accounts in collections. It is important to know how this affects your credit and what you can do about it, since having an account in collections can be devastating to your score.

While it is best to avoid them, if you already have collections reported on your credit report, there are a few things you should know.

What is a collection?

A collection can result from a debt that has not been paid on time. If you become significantly delinquent on a debt, such as a medical bill or credit card bill, the original company owed will often write off this debt as a loss and sell it to a collection agency. The collection agency will then attempt to recover the money owed.

While different creditors and lenders have different policies, many credit card accounts are sent to a collection agency after 180 days of non-payment. Either the original creditor or the collection agency may report the account in collections to a credit bureau, resulting in the account being marked on your report with a “collection” status. You will not necessarily be notified by the original creditor that your account is being sent to collections.

If an account in collections is reported on your TransUnion or Equifax credit report, you can access your full report or the collections page to view details about any reported accounts. (You’ll only see the collections page if open or closed collections accounts have recently been included on your report.)

What does it mean for my credit?

If you have an account reported as in collections, your credit score may drop by a substantial amount. The degree to which a collection hurts your credit score is generally correlated with how high your credit score is when the collection agency reports the debt. The higher your score, the more points you can lose.

In addition, the amount of damage to your credit score may be affected by the collection amount, or how much you owe. For example, if the original debt you owed was less than $100, the resulting account in collections may show up on your credit report but it may not significantly hurt your credit score or even hurt it at all. Some credit scoring models may also differentiate between types of debt, such as medical versus non-medical, or disregard accounts in collections that have been paid.

The resulting credit score drop from having an account in collections can impact your future financial plans. It may cause you to be denied for credit cards and loans, especially if the collection is recent or remains unpaid (or both).

Tips on what to do with collections accounts

There are many different ways to respond to debt collectors. What’s most appropriate for you will depend on your circumstances. If you believe the information about the account in collections is accurate, you could attempt to negotiate and settle with the collection company. We recommend you check out resources from the Consumer Financial Protection Bureau on how to reply to a debt collector and what the best ways are to negotiate a settlement.

While you are determining what to do with your account in collections, make sure to keep your other debts and accounts up-to-date.

As time passes, the account in collections may have a less significant impact on your credit. In addition, paying all your other bills on time could help your credit score recuperate from a debt collection.

How to dispute an erroneous collections account

As with other types of credit report errors, you may file a dispute with the credit bureau if you believe the account in collections reported is false or outdated. For example, if it is not your debt or if it has been seven years from the original delinquency of the debt, you could request to have the collections information removed from your report.

Learn about how to dispute wrong information on your credit report.