Are you asking yourself, “How many points will a collection affect your credit score?”
We have answers for you. And we’ll also delve into how collections work, and what you can do to bring your score back up.
How Many Points Will A Collection Affect Your Credit Score?
Credit scores are highly important.
Not only can they help you get mortgages, loans or higher card limits, but they can also help if you’re seeking employment. Some employers might look at your credit score before they even consider hiring you. Due to this, many of us work to boost our credit scores as much as possible.
Every time we view a collection account on our credit report, we cringe from knowing these accounts have a negative effect on a credit score. Those accounts show up each time a collection agency reports debts to credit bureaus. The resulting effect it has on a credit score is usually devastating.
However, there are a few ways to avoid collecting accounts from damaging your credit score. Keep reading to discover how collecting agencies work.
The amount of the collection debt is essentially irrelevant
This means if the debt is over $1, it does not matter how much you owe. Instead, the debt impacts your credit score the same way, regardless of how high the dollar amount is. For instance, if you have a debt of $200 and it lowers your score by 50 points, a $100,000 debt would drop your credit score by the same—50 points.
The number of collection debt matters somewhat
The biggest hit to your credit score will occur when that first collection account reports. Each additional collection will have more of a marginal impact. As long as the collection agencies are not continuing to update the account every month, the score impact will lessen over time.
Paying off a collection debt CAN lower your credit score
The date the collection debt shows up on a report is very significant. For example, a debt may have been defaulted on with a bank in 2011, but when it got sold to the collection agency in 2016, they will report the open date as 2016. That date does affect scores – the more recent, the more negative impact. A collection account is a derogatory “event” on your credit, regardless of whether it is paid or unpaid.
Ninety-five times out of one hundred, the payment of a collection will have zero impact on scores (payment of an original creditor account is very different – we are just talking about third party collections here). Further, if the reporting of a collection has not been updated at all for two or more years, paying that collection could drop your score because the date of last payment will become current.
But yes, there is a way to pay a collection AND have it improve your scores. Keep reading.
Are medical collections left out from your credit score?
No, not when you’re dealing with FICO scores. Many argue that medical debt is separate from other kinds of debt. This is because it is often beyond your control. Also, it can drop more than 100 points off of your score, and can stay on your report for 7 years. The current FICO algorithm does not differentiate between medical collections and any other type of collections – they all impact scores equally. Some of the confusion which arises regarding medical debt is due to the fact that when you are getting a mortgage, medical debt may be subtracted from your Debt-to-Income Ratio. But that is separate qualification criteria that has nothing to do with FICO scores.
Removing a collection account will usually translate to a score boost
When contacting a collector to settle, you should always try to get them to agree to a “payment for deletion.” There is a good chance it will boost your scores. The only way to know in advance of calling to settle, is to run a “what-if” simulation. Basically you will want to run a scenario that shows how many points you would gain if you paid the collection (typically 0), versus how much your score would increase if the account was completely removed.
There are two options that can provide you this information: 1) if you are working with a mortgage company and they have pulled your credit in the last 30 days, they can run such a simulation; or 2) you can sign up for and run the analysis – this three-bureau monitoring site has excellent simulation capabilities. The scores are consumer scores, not FICO, but the question here is which collection(s) should you try to pay or delete, based on the potential score improvement you may see. Of course, there may be other reasons for you to pay a collection you believe you owe, but if you are looking for a score improvement, follow the instructions above or call us – we use these tools all the time.
Not all collection agencies will agree to a payment for deletion. These agencies have contracts with the bureaus to pull and report credit. The bureaus don’t want collections removed from credit reports (for several reasons that tie to protecting their business model); if the bureaus see too many deletions, they can stop doing business with the collector (which means the collector is out of business). If you go through the simulations above, you will know whether deletion is required and it will help guide your decision whether to pay.
Remember, collections will fall off your report 7 years from the date of your first missed payment with the original creditor. It doesn’t matter how many times the debt gets resold, unless the collector re-ages it (which can happen). Furthermore, every type of debt has a statute of limitations for collection (which varies by state and type of debt) where, when reached, you are no longer legally obligated to pay. Knowing whether your debt is time-barred will help you in settlement negotiations.
Charge-Offs & Collections
After 180 days of no payments, a creditor thinks you will not pay anything at all on your credit card bill and they charge-off your account. A charge-off is a highly detrimental entry that stays on your report for 7 years from the date it first became delinquent.
After an account has been charged off, creditors often utilize third party debt collectors to attempt to collect a payment. The original creditor may continue to own the account, but assign it to the third party for collection. In that case, only the original charge off with the balance will be reporting. However, if the creditor sells the debt, a new collection account will report to your credit file, so now you have two major negative items all on the same debt: a charge-off (with zero balance) and a collection (with a balance). It takes a toll on your credit score.
It’s a good idea to consider settling with the original creditor before they sell the debt and the collection account shows up. Payment should also stop any further account updates and allow the charge-off to age.
The more severe the delinquency, the more money that is past due, and the more recent the collection all produce a devastating hit to your credit score.
If your credit scores are in the 700s, the first collection can cost you well over 100 points. If you have lower scores and other types of negatives, the new collection will have less impact but it will still be significant. Since the FICO algorithms are extremely complex, and the details of how they work are kept highly secret, we cannot describe exactly how many points your score will drop due to a charge-off or a collection. However, it will most likely amount to a lot, and you can always run the what-if simulations described above to find out for your particular case.
Overview of Collections: How Many Points Will A Collection Affect Your Credit Score?
Collections can happen to anyone, whether you are already responsibly managing your credit or if you have arrived at difficult times financially. The trick is to rebuild your credit, and Go Clean Credit can help.
Need to know more about how many points will a collection affect your credit score? Let us know! To enlist the help of a trustworthy, effective credit repair company, contact Go Clean Credit today.
No matter what your situation, Go Clean Credit has a solution. We have many credit repair programs that are available to help you overcome your credit situation and place you back on the path to financial success. Real credit restoration is not a once size fits all model and we tailor your needs to the right program, but most people can start for just $99 per month.
We have fixed price programs that get you back on track in as little as 5 months, debt resolution solutions, programs geared toward people who have had recent short sales or foreclosures and many others. Help is just a free phone call away, or you can fill out an appointment request. to schedule a free consultation today.