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Understanding Debt Collections and Their Impact on Your Credit
Types of Debt That Can Go to Collections
Multiple missed payments on loans, credit cards, or other bills can lead to your account being sent to collections. This creates a negative entry on your credit report, which can harm your credit score. Debts that can go to collections include:
- Credit card balances
- Student loans
- Auto loans
- Personal loans
- Utility bills
- Bank fees and overdrafts
- Fines and fees from courts or government agencies
- Unpaid tuition
- Late rent payments
- Medical bills (only those of $500 or more may appear on your credit report)
What Happens When a Bill Goes to Collections?
When you fall behind on payments, your creditor may send your account to collections. Some creditors have in-house collection departments, but many sell the debt to third-party collection agencies. This typically happens when your payment is 120 to 180 days late, but it can vary. Once in collections, the balance on your charged-off account changes to $0, and a new collection account appears on your credit report. The collection agency will then contact you to collect the debt.
Should I Pay Debt That Goes to Collections?
Paying off your debt in collections may be the simplest way to end the process. Even if your debt is sold to a third-party collector, you’re still legally obligated to pay it. If you can’t pay in full, consider negotiating with the debt collector or consulting an attorney. Before paying, ensure the debt collector is legitimate and confirm the debt details.
How Long Do Collections Stay on Your Credit Report?
Paid and unpaid collections stay on your credit report for seven years from the date of your first missed payment. A collection account is considered a negative entry and will impact your credit score for as long as it appears, though its effect will lessen over time.
Collection Accounts That May Not Affect Your Credit Scores
Certain collection accounts may have minimal or no impact on your credit scores:
- Medical Collections: Debts under $500, paid medical collections, and unpaid medical collections less than a year old no longer appear on credit reports.
- Paid Collections: Paid collection accounts no longer affect FICO® Scores 9 and 10, as well as VantageScore 3.0 and 4.0.
- Small-Dollar Collections: FICO® Scores 8, 9, and 10 ignore collection accounts with an original amount under $100.
How to Avoid Having Accounts Go to Collections
To avoid collections, consider these strategies:
- Set up reminders or automatic payments: Ensure bills are paid before their due dates.
- Check your credit reports regularly: Monitor outstanding debts and payments.
- Reach out to your creditors: If you’re struggling, contact your creditor to work out a payment plan.
- Consider credit counseling: A credit counselor can help you create a repayment plan and negotiate with creditors.
- Be careful about cosigning: Unpaid debts on cosigned loans can affect your credit.
The Bottom Line
Collection accounts can significantly impact your credit. Regularly check your credit reports and dispute any inaccuracies. Paying off a collection account can eliminate its impact on your credit scores calculated using the latest FICO® and VantageScore models. Over time, the impact of an unpaid collection account will decrease, and it will eventually drop off your credit reports.
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