How Debt Collections Hurt Your Credit Score — and How to Fix It

FT Contributor
A man holding a document that is labeled "debt collection."

U.S. consumer debt collectively hit a staggering $4 trillion in 2019. To put this number in perspective, that’s nearly 20% of the country’s entire GDP for that year. There’s no doubt that Americans across the country are being crushed by a burden of debt.

This struggle with debt has led many modern Americans to have their outstanding bills sent to debt collectors. The term may sound like something out of a Charles Dickens novel — although, fortunately, having an account sent to a debt collector these days won’t send you to the poor house.

That said, having a collections account with your name on it can still be detrimental to your financial state — especially your credit score. If you’re dealing with a debt collections agency, here are some facts, tips, and suggestions to better understand your situation and how you can fix it.

Table of Contents

Understanding Debt Collections

A debt collections agency is a company that, unsurprisingly, specializes in collecting debts. Say, for instance, you leave a hospital bill unpaid for several months. Typically around 180 days after the bill is created, the hospital will turn it over to a debt collections agency for pennies on the dollar.

This agency then takes it upon themselves to collect the debt. They open a collections account (that’s the part that really hurts your finances over the long term) and proceed to hound you in an attempt to recuperate the funds.

What Happens When Your Debt Goes to Collections

When your debt goes to collections, it still has to be paid. Even if you pay it promptly, though, the greatest negative effects come from simply having a debt collections account show up on your personal history in the first place.

This can have a significant impact on your credit score, as your payment history determines as much as 35% of your entire score. The actual effects on your score may vary depending on where your credit currently lies. For instance, credit is typically lumped into five categories of “health.” According to the FICO credit score model these tend to be as follows:

  • A poor credit score is below 579.
  • A fair credit score is between 580 and 669.
  • A good credit score is between 670 and 740.
  • A very good credit score is between 740 and 799.
  • An excellent credit score is above 800.

As a general rule of thumb, the higher your score is, the more it can drop when a debt collections account pops up on your credit report. In addition, FICO considers:

  • How late the payments actually were.
  • How much money was owed.
  • How recently the payments were missed.
  • How many late payments are on your account.

Regardless of the specifics, allowing a bill to go to collections can have serious side effects on your credit score. If the score drops by dozens of points, it can inhibit your ability to do things such as taking out a new loan or being approved for a credit card.

When Is a Collections Account Removed?

According to the Fair Credit Reporting Act, a collections account must be removed from your history when they “antedate the report by more than seven years.”

In other words, the only way you can get a legitimate debt collections report removed from your credit history is by waiting for seven years from when the account officially became delinquent (that is, when it reached that 180-day point where it was sent to collections).

The only way you can get around this seven-year waiting period is if the account is incorrect in some way. In that case, you can write a dispute letter to dispute the validity of the account, and the credit bureaus will be forced to analyze and confirm its authenticity or remove it from your report.

How to Pay Off Delinquent Debt

If you’re dealing with delinquent debt, there are a number of ways that you can go about fixing the situation. The first thing to do is to pay off the past-due debts, but the fixes don’t stop there.

Creating a Payment Plan

If you have a delinquent debt that you can’t pay off in one lump sum, the next best thing you can do is set up a payment plan to pay it off as soon as possible. For instance, if you owe $1,000 and you can only scrape together $100 per month, you can still pay off the debt over the course of the next 10 months of payments.

Debt Settlement

Often you can negotiate a lower total sum required to settle your debt. For instance, in the above example, if you owed $1,000, you could try to convince the debt collections agency to settle for $750 or even $500 if it’s paid in a lump sum. When negotiating with debt collectors, make sure to:

  • Give them as little information as possible regarding your ability to pay your debts.
  • Request a “pay for delete” settlement that means once you’ve paid the debt, they’ll actively remove the collections account from your financial history.
  • Make sure you understand your rights under the Fair Debt Collection Practices Act so that you aren’t bullied into an unfair situation by a collections agency.

Negotiating with a debt collections agency can feel scary, but if you do your homework beforehand, it doesn’t need to be intimidating.

How to Raise Your Credit Score When You Have Debts in Collections

Once your initial debt collection situation is resolved and your delinquent debts are either being paid off or are fully paid off, it’s time to begin rebuilding your credit. There are a couple of effective strategies for doing this besides actively paying your debt:

Dispute Any Errors

The first thing you can do is look for any errors on your report by:

  • Obtaining a free copy of your credit report by visiting the Federal Trade Commission website and following the steps by phone or snail mail — do not contact the credit bureaus directly at this point.
  • Look over the report to see if any of the accounts or their information are incorrect.
  • If you find information that has been reported incorrectly, you can write a collections dispute letter asking the collections agency to confirm the debt — you must do this within 30 days of being notified about your debt from the debt collections agency.

If the request for debt validation leads to the collections account being removed or you don’t hear a response within 30 days, you can check the credit bureaus to see if they’ve removed the account from your report. If it’s still there, reach out with proof of your dispute letter and proof of either the lack of validation or of a response. You can contact the three major credit bureaus, Equifax, Experian, and TransUnion and dispute your report online.

Keeping Your Credit Utilization Rate Low

Along with disputing any errors, it’s important to exercise healthy credit usage while your account recovers and your credit score begins to climb again. This includes:

  • Keeping your credit utilization low.
  • Maintaining a perfect payment history.
  • Paying down existing debt (even if it’s not in collections).
  • Creating a budget to avoid adding to your debt.

Even if you have to wait for seven years, if you create healthy credit habits now, you’ll be able to benefit from them over the long term and hopefully avoid having to deal with debt collections in the future.

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