How Does Debt Collection Affect My Credit?

Getting a loan in default status is not always a pleasant experience. Receiving collection letters and calls is already a headache in itself. Having to figure out how to pay off all those loans while keeping a manageable budget and taking care of other bills is quite the juggling act.

When push comes to shove and certain bills do not get paid, they end up getting reflected on a consumer's credit report. But how exactly does an account in collections affect your credit?

At the onset

Once an account falls behind on payment, it is then reported to the credit bureau as a delinquent account. Either the original creditor or the debt collection agency sends regular monthly updates to the credit bureaus regarding an individual's payment status. It can be reported on its 30th day of being behind, after no payment arrangements have been set up; it may also be reported on its 90th day of being late.

Either way, an account reported as delinquent stays on a person's credit report for up to seven years. The seven-year period starts 180 days (or six months) after the account has been first deemed as late. The creditor is then given 90 days to inform the credit bureau of the date the account in question has been placed in collection, or “charged-off,” meaning it has been written off as a bad debt.

The implications

Having a collections account reported in a credit report spells trouble. If a person has a relatively good credit score but starts to have collection accounts on their credit report, their credit score will start to drop. As time goes by and the account remains in default, their credit score will still continue to plummet. When this happens, he or she will have difficulty obtaining additional credit or loans in the future. Future lenders will take this into consideration, and they can very easily deny your application. This is especially possible when they see that the collection account is fairly recent, unpaid for a long time, or both. These lenders will think twice before granting you an extra line of credit.

A creditor may also decide to grant a judgment against an individual owing them a debt. When one receives a judgment, he or she is ordered by court to make payments on the debts that are due them. Judgments also are notated on a person's credit report, and they last for up to seven years from the date this was first reported.

In fact, lawsuits, collection accounts, and other items that are reported on a debtor's credit report (such as bankruptcies, criminal records, overdue alimony and child support, and the like) may be reported beyond the usual time limits that have been set. This is possible if an individual has applied for $150,000 worth of credit or life insurance, or higher. This rule also takes effect if the debtor applies for a job that has an annual income is at least $75,000.

The solutions

Paying off the collection account is a good way to improve one's credit score. Contrary to popular belief, balance payoffs do not remove the negative notation on the report; they will simply be marked “paid in full”. Doing so may not drastically brings one's credit score back to normal again, but a significant improvement will definitely appear. Aside from the lowered score, an individual will have to worry about additional expenses in the form of late fees and interest charges.

Arranging for a settlement either with a collections agency or a debt negotiation firm will reflect as a “settled in full,” and it will not be considered as a payment in full. Be wary of collectors or customer service representatives who inform you otherwise.


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How does debt collection affect your credit report