Having collections on your credit report can definitely hurt you. Collections indicate you have unpaid debt that has been turned over to a collection agency. This type of negative item can significantly lower your credit score and make it more difficult to get approved for credit. However, not all collections have the same impact, and there are steps you can take to remove collections from your credit report.
How collections impact your credit
When an original creditor writes off your unpaid debt, they may sell or transfer that debt to a collection agency. The agency will then attempt to collect the money you owe. If you continue not to pay, the collection account will likely be reported to the major credit bureaus – Experian, Equifax, and TransUnion. This is when the collection will start to directly hurt your credit.
FICO, the most widely used credit scoring model, considers the following factors when calculating your score:
- Payment history – 35%
- Amounts owed – 30%
- Length of credit history – 15%
- New credit – 10%
- Credit mix – 10%
As you can see, payment history has the greatest impact on your score at 35%. Collections are a negative mark on your payment history. Plus, the amount you owe to the collection agency contributes to your amounts owed factor.
Here’s an example to demonstrate how collections can lower your credit score:
| Credit Score Factor | With No Collections | With Collections |
|---|---|---|
| Payment history | All accounts paid on time | 1 collection reporting as unpaid |
| Amounts owed | $5,000 total debt | $5,300 total debt ($5,000 + $300 collection) |
| Credit score | 720 | 680 |
As you can see in this scenario, a new $300 collection caused the credit score to drop 40 points. This person would now be considered a subprime rather than prime borrower.
How long collections stay on your credit report
Collections can remain on your credit report for up to 7 years from the date the debt first became delinquent and was turned over to collections. This is true even if you end up paying the collection account.
The collection will continue to be factored into your credit score until it naturally ages off your credit report after the 7 year period passes. A paid collection is better than an unpaid one, but it will still weigh down your credit for years.
Here is the typical timeline:
| Date | Event |
|---|---|
| January 1, 2017 | Credit card becomes 120 days past due, original creditor charges-off account |
| February 1, 2017 | Debt is turned over to ABC Collections |
| March 1, 2017 | ABC Collections reports collection account on credit report |
| February 1, 2024 | Collection ages off credit report after 7 years |
No matter what the status of the collection account, it will automatically fall off your report once those 7 years are up. The collection agency is no longer allowed to report expired collections.
Strategies for dealing with collections
Just because you have collections doesn’t mean you are completely out of luck. Here are some strategies for handling collections and minimizing the damage to your credit:
Pay off the collection account
One option is to pay off the past due debt in full. This will change the status to a “paid collection.” Paid collections have less of a negative impact than unpaid collections.
If you take this route, get payment agreements in writing from the collection agency stating they will remove the account from your credit report upon payment. Some may agree to delete while others will not.
Negotiate a pay-for-delete
You may be able to negotiate with the collection agency and agree to pay a portion of the debt in exchange for having the collection deleted from your credit report. This is known as pay-for-delete.
The collector is not obligated to accept this offer, but it never hurts to try negotiating. Get any pay-for-delete agreements in writing before sending payment.
Dispute the validity of the collection
If you don’t believe the collection account is accurate or belongs to you, file disputes with the credit bureaus. Provide as many details as possible explaining why the collection account should be removed.
The Fair Credit Billing Act gives you the right to dispute inaccurate information. The bureaus are required to investigate. If the collection agency cannot validate the debt, it must be deleted.
Ask for goodwill deletion
You may be able to ask the original creditor to remove the collection account from your report by requesting a goodwill deletion. Send a polite letter explaining your situation and politely ask them to withdraw the account they previously turned over to collections.
If they agree, the creditor will contact the credit bureaus and request removal. Goodwill deletions are not guaranteed, but are often successful if you have a sympathetic case.
How to rebuild credit after collections
Recovering from the impact of collections takes time and discipline. Here are some tips for rebuilding your credit over the years it takes collections to fall off your report:
Pay all current accounts on time
On-time payment history is the most important credit score factor. Be sure to pay all your open credit cards and loans on time going forward.
Lower credit card balances
Keep credit card balances as low as possible, well below 30% of the card’s limit. This will help lower your amounts owed.
Hold off on new credit
Wait to apply for new credit like car loans until the collections start to age off your credit reports. New inquiries will just ding your credit further in the short term.
Become an authorized user
Ask a family member with good credit to add you as an authorized user on their credit card. This can help build your payment history.
Use secured cards
Open new secured credit cards, which require a cash deposit. Making on-time payments can rebuild your payment history.
Conclusion
Collections can significantly damage your credit, especially if left unpaid. The unpaid debt continues to appear on your credit report and drop your score for up to 7 years. But don’t panic if you have collections accounts! By using credit rebuilding strategies and letting time pass, you can eventually recover from the collections and improve your credit health again.