How Do Debt Collections Impact Your Credit

There are times in life when credit is needed to finance major or minor expenses, and access to various loans and credit cards can be easy to get. However, financial circumstances can change in a moment’s notice, leading to an inability to pay debts on time or in full. If you have failed to pay your bills, accounts may make their way into the hands of a debt collection agency. When this takes place, your credit score is impacted in a serious way.

A collections account is the result of missing payments on debt for an extended period, typically more than 150 days. The original lender sells the debt to a collections agency or debt collector who then attempts to receive payment from you as the debtor. Many debt collection tactics involve constant calling to demand payment and harshly-worded correspondence about the consequences of not paying. These collection account practices are frustrating at best, but the most devastating outcome is the impact on your credit score and report.

The Impact on Credit

Debt collection accounts create a slew of issues when it comes to your credit score and report. First, your credit score will drop by a significant amount once the debt is reported to the three credit bureaus. The amount of points you lose by having a debt in collections varies depending on how high your credit score was before the delinquency. The higher your score, the more points you will lose.

Your credit score may also drop more based on the amount of money in collections. For instance, a smaller account balance of $100 or less may have a less dramatic impact on your credit score than a debt of thousands of dollars. The type of debt also plays a role – medical debt may be looked at in less severe light than a personal loan, a credit card, or a mortgage default. However, regardless of the type of account or the amount, getting access to new credit in the future is a challenge.

A collections account on your credit report signals to creditors that you are a high-risk borrower. This means you may not receive approval for new account applications, or you may pay a higher cost for borrowing in the future. These implications can be far more damaging in the long run than you realize.

Tips for Navigating Debt Collection Accounts

If you’ve found yourself in a position where a collection agency is pursuing you for payment on a delinquent account, you have a few options. You can pay the amount owed to the collector without question or negotiation. While this is a sound strategy if you want to clear the debt immediately, it may mean you are paying more than you need.

Many people with debt in collections will attempt to negotiate the debt amount down with the debt collection agency. This strategy may work because debt collectors pay a small percentage of the total amount you owed to the original creditor, often between 10 and 15%. Any amount they can collect above the price they paid is profit for them, making negotiation a viable option.

A general rule of thumb is to offer no more than 40 or 50% of the original amount owed, and see what the debt collection agency will accept as full payment.

If you use the debt negotiation strategy, know that this does not immediately eliminate the negative mark from your credit report nor does it immediately improve your credit score. Collection accounts stay on your credit for seven years, meaning you’ll need to implement other tactics to improve your credit over time. However, paying off a collection account can help when you apply for new accounts, since creditors will see you made an effort to pay what you owed.

Having an account find its way to collections is not the end of the world, but it can significantly decrease your credit score and ultimately, your access to credit in the future. Be sure to face your debt collections head on instead of avoiding the issue, and determine which strategy for managing the collections account is best suited for you. Over time, your credit will rebound when you put in place the right habits that showcase responsible use of credit, including paying your bills on time and in full. And this gives you a greater chance of securing a low interest rate debt consolidation loan.

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