Getting calls from debt collectors can be overwhelming and stressful. Additionally, having a collection account listed on your credit report can bring down your credit score considerably. You may be wondering just how much a collection can impact your credit score.
In this article, we’ll discuss the credit consequences of having an unpaid debt go to collections. We’ll also review some strategies for having a collection account removed early.
What are Collection Accounts?
A collection account is a debt you haven’t paid that’s been sent to a collections agency. Lenders, landlords, and medical providers may sell your unpaid debt to collections agencies when they’ve given up hope that you’ll make your payment.
It typically takes a few months for a delinquent debt to get sent to a debt collector. Once this occurs, the collections agency may repeatedly reach out to you by phone or mail until you pay up. Their goal is to collect as much of the payment from you as they can.
In these situations, the best thing to do is repay your debt as soon as possible. In some cases, you may be able to settle with the collection agency and only pay a partial amount.
When are Collection Accounts Reported to Credit Bureaus?
Collections can only impact your credit score once they’ve been listed on your credit reports with one or more of the three major credit bureaus: TransUnion, Experian, or Equifax. Collections are typically reported to the credit bureaus as soon as collection agencies receive the debt.
However, unpaid medical debt is a different story. The credit bureaus give unpaid medical debt a 180-day waiting period before they list it on your credit reports.[i]
Not all debt goes to collections right away. For example, missed credit card payments will simply show up as late payments on your credit reports. In most cases, late credit card payments only show up on your credit report once they’re at least 30 days past due.
How Do Collection Accounts Affect Credit Scores?
Collections can stay on your credit report for up to seven years after the date of your first missed payment on the delinquent account.[ii] Collections may have a serious impact on your credit score, depending on what type of credit scoring model is used.
Collections are considered a part of your payment history, which is the most influential factor that makes up your credit score. Payment history is worth:
Initially, a new collection account may drop your credit score by as much as 100 points.[v] The higher your credit score was to start with, the more a collection can drag it down.
4 Factors That Impact How Much a Collections Can Affect Your Credit Score
While a collection has the potential to bring down your credit score significantly, the following factors all play a role:
#1 Whether or not the collection account is paid
Paying off your delinquent accounts’ balances can get collection agencies to stop calling you. It can also keep you from getting sued by the debt collector.
You may assume that paying the account will remove the collection from your credit report. Unfortunately, collection accounts can stick around on your credit report for up to seven years, whether they’re paid or not.
The good news? Newer consumer credit scoring models may ignore paid collection accounts. In turn, your credit score won’t be impacted by a paid collection account with any of the following credit scoring models:[vi]
- VantageScore 3.0
- VantageScore 4.0
- FICO Score 9
Just keep in mind that most mortgage credit scoring algorithms still include paid and small-balance collection data.
Is it better to pay off your collections?
With this in mind, it’s always a good idea to pay off your collection accounts, whether you decide to settle with your collections agency or pay the balance in full.
#2 The size of the collection’s balance
Collection accounts with small balances may be ignored in some consumer credit scoring models. For example, FICO Score 8 ignores any collection accounts with balances below $100.[vii]
In 2023, a new rule for unpaid medical debt will take effect too. The credit bureaus will stop including medical bill collection accounts with balances under $500 on credit reports.[viii]
Note: As of July 1, 2022, many changes have been made that effectively remove 70% of medical debt from consumer credit reports.[ix] The first change is that paid medical debt collection accounts are no longer included in credit reports. What’s more, unpaid medical debt collections only start showing up on credit reports after one year of delinquency, rather than the prior six months. These changes give medical patients more time to negotiate their bills with insurance providers and debt collectors before impacting their credit reports.
#3 The type of debt owed
Speaking of medical debt, it’s treated a little differently in the case of collections. Many credit scoring models don’t weigh unpaid medical debts as heavily as other consumer debts.
The reason? Lending experts acknowledge that medical debt often arises from unexpected health woes, rather than careless spending or poor financial management. As a result, medical debt doesn’t accurately reflect someone’s ability to pay their debts on time.
#4 The amount of time that has passed
As with all negative marks, the impact of collections on your credit score typically diminishes over time. That’s because older credit activity isn’t weighed as heavily as recent credit activity. Once a collection account finally falls off your credit report, it won’t affect your credit score at all.
How to Remove Collections From Your Credit Report
You may be wondering if you can get a collection removed from your credit report early. In some cases, you can.
Here are a few ways to remove a collection:
- Dispute inaccurate collections with the credit bureaus – Over one-third of Americans have errors on their credit reports.[x] For this reason, it’s very important to check your credit report each year. You can do so for free once every 12 months at com.As you look through your credit report, make sure that any collection accounts are accurate. Maybe you notice that a collection that’s older than seven years is still showing up. Or, maybe the information about the collection isn’t correct.In these situations, you can file a dispute with each credit bureau individually. You can do so by mail, by phone, or online. During the dispute, you’ll need to provide documentation to back up your claims. The credit bureaus are required to investigate the issue within 30 to 45 days.[xi] If the collection is found to be inaccurate, it will be removed.
- Ask for a goodwill deletion – Once you’ve fulfilled your payment obligations, you can politely ask to have the collection removed by your creditor or debt collector. Debt collectors and creditors don’t have any obligation to remove your paid collection, but they may grant your request. This type of removal is known as a “goodwill deletion.”When you make your request, make sure to explain your financial circumstances. If the rest of your payment history has been positive, you may have a better shot at getting your request approved. Even if they deny your request, it’s still worth a try.
- Pay for it to be deleted – Some debt collectors offer a “pay-for-delete” arrangement where you pay your debt in exchange for having the collection taken off your credit report.Unfortunately, pay-for-delete doesn’t carry legal weight. You can make your payment and the collection agency may still refuse to remove the collection from your credit report. To prevent this predicament, it’s a good idea to have a written confirmation from the agency agreeing to delete the collection when you send the payment.It’s also important to note that pay-for-delete arrangements are not very common. That’s because debt collectors are legally obligated to report honest information to the credit bureaus. Deleting your collection may place them in an ethical gray area.
If you’re unable to remove your collection, you’ll simply have to wait for it to fall off after seven years.
In this case, you may want to consider adding a consumer statement to your credit reports. A consumer statement gives you up to 200 words to explain the circumstances that lead you to incur the collection.[xii] This information may give lenders more context about your predicament, and potentially, more understanding for it. Just make sure to remove your statement once the collection has finally fallen off your report.
How to Handle a Collections Account on Your Credit Report
Since collections can drag down your credit score, you’ll want to do what you can to boost it in other ways.
For example, you can commit to the following credit habits going forward:
- Making all of your other debt payments on time
- Maintaining low credit card balances (ideally below 30% of your total credit limit)
- Avoiding unnecessary credit applications
By following these steps, you’ll have a positive payment history and low credit utilization to offset the negative impact of the collection account.
Certified Credit: Affordable Mortgage Credit Reports and Lending Solutions
As you can see, having a collection account on your credit report isn’t ideal, but it’s not the end of the world. Its impact on your credit score won’t last forever. If you have a collection, it’s a good idea to work with a lender that understands their requirements and offers tools that can help you raise your credit score, such as these credit score improvement tools offered by Certified Credit.
For more credit-related tips, you can visit the Certified Credit blog. There, we share our top credit insights for mortgage lenders and consumers alike.
If you’re a mortgage lender, make sure to check out our growing suite of credit solutions. We offer:
- Affordable credit reports
- Credit score improvement tools
- Fraud prevention solutions
- Automated lead generation tools
- Automated prequalification
- Automated verification of income and employment
- Settlement services
To learn more about our solutions, schedule a credit consultation with one of our mortgage solutions experts today.
[i] Experian. How Does Medical Debt Affect Your Credit Score?
[ii] Experian. How Long Do Collections Stay on Your Credit Report?
[iii] FICO. What is Payment History?
[iv] VantageScore. The Complete Guide to Your VantageScore.
[v] CreditCards.com. 13 things that hurt your credit score.
[vi] CreditKarma. What you should know about the VantageScore 3.0 credit scoring model.
[vii] CreditCards.com. 13 things that hurt your credit score.
[viii] CNBC. As of July 1, your medical debt may no longer hurt your credit score—here’s why.
[ix] Equifax. Equifax, Experian, and TransUnion Support U.S. Consumers With Changes to Medical Collection Debt Reporting.
[x]CNBC. A third of Americans found errors on their credit reports. Here’s how to fix those mistakes.
[xi] Experian. How to Dispute Credit Report Information.
[xii] Experian. Should I Add a Consumer Statement to My Credit Report?