It’s always a bummer to get a letter from a collection agency and typically will bring up some questions. But first, let me say, it is not the end of the world. It sucks for sure, but we can take measures now to avoid this in the future. This blog post will answer some of your most pressing questions about collections and credit scores.
The key questions we will answer are:
2. What happens to my credit when a bill or account goes to collections?
3. Is a collection account different than a charge-off?
4. Why do collections affect my credit score?
5. How long do collections stay on my credit report?
6. How to remove a collection from my credit report?
7. If I pay a collection, will it be removed from my credit report?
What is a collection account?
Collection accounts occur when a debt is passed on to an outside agency called a “collection agency” after the original creditor has given up all attempts to collect the debt themselves. The collection account gets listed as a separate account with its own credit reporting status. While this is a collection account, it’s also an unpaid debt.
What happens to my credit when a bill or account goes to collections?
When a bill or account goes to collections, your credit score takes a hit, often a significant hit. A collection can lower your FICO score by 50-100 points (on a scale of 300-850) once reported on your credit report. Below is an example of how a collection could show up on your credit report:
Is a collection account different from a charge-off on my credit report?
A collection account is different from a charge-off. A charge-off is a final step by the original creditor before writing off the unpaid debt. A charge-off may also be referred to in your credit reports as “charged-off.”
In this case, you did not pay the original creditor. If a debt is written off or “charged-off” on your credit report, it is assumed to be “uncollectible” by the creditor.
Having an outside collection agency attempt to collect the debt is the next step. In most cases, they will report a new “collection account” on your credit report.
How do collections affect my credit score?
A collection on your credit report can lower your score by up to 100 points. How much your score drops depends on what type of account it is and the age of the debt and your credit in general. The more negative items on your credit report the less drastic it will typically be once reported; however, if you have a majority of positive credit only, once the collection account is reported, the more devastating it will be to your credit. In general, a collection that’s less than six months old will have the most negative effect on your FICO score.
How long do collections stay on my credit report?
A collection account will remain on your credit report for seven years from the date of first delinquency (when you first fell behind on a payment). It’s a common myth that the seven years start over each time it goes to collections; good news, it is just that, a myth.
Can I remove a collection from my credit report?
In some cases, yes. The Fair Credit Reporting Act states that “you have the right to dispute inaccurate information in your file and request removal of incorrect information.” It seems simple enough, right? In our experience, it is quite the opposite experience for most consumers.
How to remove a collection from my credit report?
Send a written dispute of the information to each credit bureau and include the following:
- What is it actually (for example, “doctor bill” or “credit card balance”)
- Why you believe it’s inaccurate (for example, “incorrect amount reported” or “arbitrary cut-off date for reporting”)
- Include copies of proof that you have paid the bill prior to collections or otherwise resolved the matter
- Send your dispute by certified mail, return receipt requested.
- The credit bureaus must respond to you in writing within 30 days.
- Send a follow-up letter after four weeks if they do not respond to confirm that they received your original letter and request removal.
Suppose the business that reported the collection to the credit bureaus cannot verify its accuracy. In that case, they must remove it from your credit report.
The Fair Credit Reporting Act does not require a company to remove an accurate collection account from your file. It is up to each collection company on whether or not they choose to remove it.
If you’re looking for more firepower, get a free credit analysis from us to see if you’re a good candidate for our attorney-backed program.
If I pay off a collection, will it be removed from my credit report?
No, the credit bureaus can remove only inaccurate information from your credit report. Your payment will satisfy the collection account and may remove future adverse reporting. Still, it will not remove the original item from your credit report. In some cases, you can request a pay-for-delete agreement with the collection agency. Again, it will be at their discretion whether they are willing to remove it or not. Make sure you have it in writing before paying, if this is the avenue you are taking.
Will paying off a collection account raise my credit score?
It depends. Your credit score will go up if you pay a collection and the collection is removed from your credit report. It usually only happens with a pay-for-deletion agreement. In most cases, your FICO score will not change if you pay the collections or charge-offs that remain on your report.
What we’re basically saying is…
Collections are a significant factor in your credit score. Suppose you’ve had any bill or account go to collections. In that case, it will stay on your report for up to seven years and affect your credit. Your bad credit score will impact your interest rate (if you qualify at all) when applying for loans. Whether the collection was due to late payments, fraud, defaulted contract terms, etc., paying off the balance won’t remove it from your credit report and will not increase your score. We offer Attorney-Backed Credit Repair, designed specifically with this end goal in mind – helping consumers gain financial freedom, become homeowners, become business owners, and more!