Your credit score is one of the most critical factors in your financial health, and unpaid debts can significantly impact it. If a debt goes into collections, it signals to lenders that you’re a higher risk, which can lead to lower credit scores and make borrowing more expensive or challenging in the future. Here, we’ll break down how different types of debts in collections can impact your credit score and what steps you can take to mitigate the damage.
How Debt Collections Impact Credit Scores
When a debt goes to collections, it typically means the original creditor has sold your account to a collection agency due to non-payment. This action can appear on your credit report and negatively impact your score. The severity of the impact depends on several factors:
- The Type of Debt
- Credit Card Debt: Unpaid credit card balances sent to collections can significantly lower your credit score. This is because credit utilization and payment history are the two most important factors in credit scoring.
- Medical Debt: Medical debts often come with a grace period before being reported to credit bureaus. While still damaging, these debts are sometimes viewed more leniently by lenders.
- Personal Loans: If you default on personal loans and they go to collections, the impact on your credit score can be severe due to the breach of a formal agreement.
- Utility Bills and Rent: Non-payment of utility bills or rent can also result in collection accounts, which may hurt your credit, even if these debts seem less significant.
- The Age of the Debt
While a collection account can remain on your credit report for up to seven years, its impact on your credit score decreases over time. However, any recent collections will have a more pronounced effect than older ones.
- The Amount Owed
Large debts in collections are seen as riskier by lenders, which can further lower your credit score. However, even small debts can cause damage if reported to credit bureaus.
How to Mitigate the Damage
Although collections can hurt your credit score, there are steps you can take to minimize the impact:
- Verify the Debt
If you’ve been contacted by a collection agency, request validation of the debt. Ensure that it’s accurate, belongs to you, and hasn’t already been paid.
- Negotiate with the Collector
Debt collectors are often willing to negotiate. You might be able to settle the debt for less than what you owe or negotiate a “pay-for-delete” agreement, where the collector removes the account from your credit report once the debt is paid.
- Pay the Debt
Paying off a collection account won’t immediately improve your credit score, but it does prevent further damage. Some newer credit scoring models, like FICO 9 and VantageScore 4.0, ignore paid collection accounts, which can benefit you in the long run.
- Monitor Your Credit Report
Regularly check your credit report for errors or inaccuracies. If you spot any issues, dispute them with the credit bureaus to ensure your report is accurate.
- Build Positive Credit History
To offset the damage from collections, focus on building a positive credit history. Pay all your bills on time, reduce credit card balances, and avoid taking on unnecessary debt.
Understanding Your Rights
As a debtor, you have rights under the Fair Debt Collection Practices Act (FDCPA). Debt collectors are required to treat you fairly and cannot harass or threaten you. Additionally, credit bureaus must ensure the accuracy of information reported. If you believe a collection account is incorrect or outdated, you can file a dispute.
Conclusion
Debt in collections can have a serious impact on your credit score, but understanding how it works and taking proactive steps can help you regain control. By verifying debts, negotiating with collectors, and focusing on rebuilding your credit, you can mitigate the damage and work toward a healthier financial future. Remember, while the effects of collections can be long-lasting, they are not permanent, and with diligence, you can recover.