A collection account is one of the most damaging types of entries you can have on your credit report. When you fall severely behind on credit payments – loans and credit card bills – the payment is moved to a collection account.
Delayed payments are generally classified as a collection if the payment is late by 90 – 120 days. However, note that there is no “set rule” for when a payment moves to collection. It depends on the lender’s internal rules and how regular/irregular you have been on your previous payments. Read More:- Raw confessions
How does a debt in collection impact my credit score?
Credit bureaus treat late payments differently based on the length of the delay. Late payments are classified as 30-days late, 60-days late, 90-days late, 120-days late and so on. The longer the delay, the more adverse is its effect on your credit score. To give an example, a 120 days delayed payment brings your score down more than a payment that is 30 days late.
Besides the number of days delay, the frequency of collections also impacts your credit score. For example, a person who has just one credit card bill moved to collections may find it easier to get approved for a future loan than a person with multiple debt collections on their credit report.
Keep in mind that debt in collections is one of the most damaging items on your credit report. When a debt is classified as collection, the borrower has not repaid the loan on time and defaulted on the loan payment terms.
Your repayment history accounts for nearly 35% of your overall credit score. So, when you default on loan payments, you can be assured that it will have a severe impact on your credit score and history. A collection account on your credit report makes it extremely challenging to secure loans in the future. And, even if you manage to get a loan, you will be charged steep interest rates.
This is why financial experts recommend working hard to make a credit account current before it goes into collections.
Will a collection be removed from my credit report when I pay it?
Very often, people falsely assume that paying off a debt in collection will remove the associated entry from their credit report and bring their credit score back to normal. This isn’t true.
Even after you pay the collection amount in full, it won’t magically disappear from your credit report. It continues to remain on the report for seven years. Your credit report continues to show that you had a collection account in the past. This stays as a black mark on your credit report, impacting your chances to secure the best loan offers in the future.
But, the good news here is that the impact of a collection account on your credit report reduces with time. Your credit scores take a huge hit when the collection account is first reported to credit bureaus by the lender. The older the collection account, the lower are its adverse effects on your credit score.
Why should I pay a collection if it doesn’t eliminate it from my credit report?
Paying a pending collection account won’t automatically bring your credit score to previous levels. But, it can benefit you in several other ways. Your credit score increases when you get a collection account deleted from your credit report or by having it marked as “paid” or “current.”
Let’s look at the different scenarios in handling collection accounts and the impact on your credit scores.
Impact of a Collection Account on your Credit Score, When You
#1: Get it Removed with a One-Time Settlement
In this scenario, you negotiate with your lender to have the collection account removed from your credit report in return for a one-time payment. Send a written request to the creditor mentioning that you’re willing to settle the outstanding balance. Usually, the settlement amount is a percentage of the total overdue amount.
The more you’re willing to pay, the more likely it is for the lender to remove the collection account from your credit report. Getting the collection account removed will eliminate the associated negative impacts and boost your credit score.
#2: Get in Removed with Full Payment
Generally, most lenders look to retrieve the full costs of the pending payments. They are not likely to agree to remove the collections account from your credit report until you pay in full. If this is the case, then offer to pay the total balance in exchange for getting the collection removed from your credit report. Make sure to get the agreement in writing.
Once you pay the full balance, the lender reports it to the credit bureau, which then deletes the corresponding collection account from your credit report. Once the collection account is removed, you can expect your credit score to increase.
#3: Settle the Outstanding Balance
While settled is not as good as closed, it’s still better than having a loan reported as a collection. When you agree on a settlement amount, you don’t pay the full outstanding balance. Instead, you negotiate with the lender to settle a percentage of the pending amount. The lender agrees to determine a loan in the hopes of recovering at least a portion of the balance.
If possible, you can negotiate with the lender by offering to pay above the “one-time settlement” fee in return for the lender reporting the loan as closed on the credit report. Note that it may or may not be possible for you to get the lender to agree to this.
Other Benefits of Paying an Account in Collections
Besides the benefits to your credit score, there are other benefits to pay an account in collection.
- Avoid legal action – When you don’t repay a loan or credit card bill on time, the lender is authorised to initiate legal action against you. By paying the amount in collection, you can avoid costly and time-consuming legal battles.
- Improves your Future Loan Prospects – Once a collection account is marked as “paid” on your credit report, it improves your chances of securing a loan in the future. Most lenders do not sanction loans to borrowers who have open bad credit. By paying a collection account, you demonstrate to prospective lenders that you have finally settled it despite delays in loan payments. This improves your loan prospects.
Paying off a collections account doesn’t immediately boost your credit score. However, there are several benefits to paying and closing an old collection account. The best option here is to negotiate with your lender to get the collection account removed entirely from your credit report in return for the payment. If that isn’t possible, try to pay and close it instead of letting old bad debts stay open on your credit report.