How A Collection Account Affects Your Credit
Have you ever wondered how a collections account affects your credit? You are not alone. Collections have been a mystery to many of my clients over the years. There is a lot of conflicting information on the web and some of that information is flat-out wrong. According to a survey conducted by CareerBuilder, 29% of employers also check an applicant's credit report. Your credit score can help you get a mortgage, loan, or higher credit card limit—or it could even help you find a job.
When you have late payments that are past due, the company to which you owe money can turn them over to a collection agency. The agency will then try to recover the money you owe, which will be recorded on your report. This action can have a negative effect on your credit score.
How many points can one collection affect your credit score?
One collection won't matter much if you have good credit scores. But if your scores are lower and you have other negative items on your reports, the new collection will drag down your credit score by quite a bit.
The credit scores most commonly used in lending choices are FICO® Scores. A Good FICO® Score means well financial options for you. Because the FICO credit scoring system is so intricate, and its inner workings are kept private, we are incapable
to foresee exactly what effect a charge-off or collection will have on your score.
The amount of the debt isn't important.
Regardless of how high the dollar amount is, your credit score is affected in the same way. For example, if you have a debt of $200 and it lowers your score by 50 points, a $100,000 debt would lower your credit score by the same amount—50 points.
Numbers don't tell the whole story.
The first collection account that appears on your credit report will have the biggest negative impact on your score. Each additional collection will lower your score. As long as the collection agencies are not continually updating their reports, the effect on your credit score will lessen over time.
You may be surprised to learn that paying off a collection account can actually lower your credit score.
The date the collection debt displays up on a statement is very important. For example, a debt may have been defaulted on with a bank in 2011, but when it got retailed to the collection agency in 2016, they will report the open date as 2016. That date does mark scores—the more current, the more undesirable the effect.
In most cases, the compensation of a collection will have zero effect on scores. Moreover, if the reporting of a collection has not been restructured at all for two or more years, paying that collection could drop your score because the date of the previous payment will become recent. But yes, there is a way to pay a collection and have it improve your scores. Keep reading to learn how.
Your credit report does not include medical collections,
Your credit report does not include medical collections when you’re dealing with FICO scores. Several argue that medical debt is distinct from other kinds of debt. For the reason that it is often beyond your control. The current FICO algorithm does not distinguish between medical collections and any other type of collections—they all affect scores equally. It can drop your score by more than 100 points and can stay on your report for up to seven years.
Your credit score may improve if you pay off a collection account.
If you have outstanding accounts that are falling into the collection, the first thing to do is work with those agencies to resolve your account. You can usually stop collections by paying what you owe, even if you don't pay back the whole amount. This will improve your credit scores almost immediately. Then you can fix your other issues and rebuild your score.
Here’s how to go about eliminating a collection:
When you settle with a debt collector, it's best to ask them to delete the account from your credit report. Doing so will help you raise your score. If you want to try this strategy, run a what-if scenario first. In other words, pretend like you paid the debt and see how that affects your score.
The truth is, paying off collections won't necessarily raise your credit score. However, if you can get the items deleted from your report, it will increase your chances of raising your score.
Are you concerned about your credit score?
We hope that this article answers your question, “How A Collection Account Affects Your Credit”
Even if you are managing your credit well or have arrived at difficult times financially, collections can happen to anyone. Cents Savvy Credit Repair can help rebuild your credit.
If you're curious about how many points a collection will affect your credit score, let us know. To enlist the help of a trustworthy, effective credit repair company, contact Cents Savvy Credit Repair today.
At Cents Savvy Credit Repair, we have a wide variety of credit repair programs to help you overcome your credit situation and place you back on the path to financial success. Our plans are designed with your needs in mind, and we tailor them to fit your specific situation. Most people can start for just $65 per month. We offer several plans to help you get out of debt. Our programs can get you back on track in just five months, and we also offer solutions for Small Business, Personal Financial Planning, Tax Preparation and Life Insurance. To schedule an appointment, call us at (734) 415-2722.