Hearing that you’ve had a debt sent to collections is never good news. Most people know that collections are bad for your credit, but many don’t know exactly how bad the damage will be or how it’s determined.
Whether you have a delinquent account that’s about to be sent to a debt collector or you’re doing damage control for collections you already have, you need to understand how and why collections affect your credit, as well as what steps you can take to minimize their harm to your credit.
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What is a collection account?
A collection account is an account that appears on your credit report when you have a seriously overdue debt that your creditor has given up trying to collect. In this case, they’ll charge off the debt and either sell it to a debt buyer or hire a third-party debt collection agency to collect it for them.
Even if the debt used to appear as a credit card account or loan under your original creditor’s name, once it’s sent to collections, it will appear as a separate “collection account” on your credit report. This, as we’ve mentioned, will cause a drop in your credit score.
How much do collections hurt your credit?
Having a collection account added to your credit report will usually cause a substantial drop in your credit score (over 100 points in some cases). 1 This is because collections and charge-offs affect your payment history, which is the most important factor influencing your score.
However, not all collections will cause an equal drop in your credit score. The hit to your credit may be different for you than it would be for someone else. The effects also depend on what stage you’re at in your own financial journey.
Factors determining how collections impact your credit
How much of a drop you’ll see in your credit score after having a collection account added to your credit file depends on the following four factors that FICO and VantageScore consider when calculating your credit score.
1. Your credit profile
If you started off with a good credit score, then your score will take a harder hit from negative marks like collection accounts. 2 Conversely, if you already had a bad credit score and a troubled credit history, adding more negative items won’t have as dramatic an effect (although it will still be harmful).
This is because your credit score is designed to reflect your creditworthiness. If your score already shows that you have a high credit risk from other negative marks in your credit history, then it won’t change as much when a new mark is added to your credit file.
2. Age of the collection account
Items that have recently been added to your credit report affect your score much more than older marks, so new collections are more harmful to your credit than old collection accounts.
In fact, according to VantageScore, most negative items have little impact on your credit score after 2 years. 3 Even collections, which are among the most damaging derogatory marks, will eventually stop affecting your credit altogether.
3. Type of debt
The effect of a collection account depends on what kind of debt it originally was. In particular, medical bills affect your credit score differently than other kinds of debt.
For starters, because medical institutions don’t usually report to the credit bureaus, medical debt doesn’t even usually appear on your credit report at all until it goes to collections, meaning it takes longer to begin affecting your credit. 4 Even after that, medical bills in collections don’t show up on your credit report until they’ve gone unpaid for 180 days.
When medical debt finally does show up on your credit report, newer credit scoring models like FICO 9 and VantageScore 4.0 weight medical collections less heavily than other collections. 5 This is because people don’t choose to go into medical debt the same way they choose to go into other types of debt, and incurring a lot of medical bills doesn’t necessarily suggest that you’d be an irresponsible borrower.
4. Payment status of the debt
Paying off a debt that’s in collections can improve your credit score—some of the time. It depends on two factors:
- The scoring model used
- Whether the debt is marked as “paid in full” or “settled”
As mentioned, newer scoring models ignore collection accounts that have been paid in full, meaning that paying off the debt will immediately improve your score. However, paid collections still damage your score in older models like FICO 8 and VantageScore 2.0, which are still used by many lenders.
Additionally, collections that are paid in full don’t hurt your credit score as much as collections that are only partially paid (i.e., through debt settlement). 6 This is because paying the full amount owed shows that you did your best to honor your agreement with your creditor.
How to check if you have collections hurting your credit
If you’re getting calls from debt collectors and you’re worried that collections are bringing your credit score down, there’s one surefire way to find out.
Go to AnnualCreditReport.com to claim your free copies of your Experian, TransUnion, and Equifax credit reports, and check each report for new collection accounts. You can do this once per year (currently once per week until January, 2023).
It’s worth noting that most of the time, your credit score won’t show up on your credit report. However, to see the effect that collections are having on your score, you can check your credit scores by signing up for a credit-monitoring service or getting your score directly from FICO’s website.
Do collections always show up on your credit report?
No, collections don’t always show up on your credit report, although they usually do.
There are two main reasons why they might not show up:
- Debt collectors aren’t required to report your debt: Credit reporting isn’t required for collections (or any other type of credit account, for that matter). This means that it’s possible that your debt collector will only report to one or two credit bureaus or even none at all.
- Very old collections can’t be reported: Every account has a credit-reporting limit, or a maximum amount of time it can stay on your credit report. Collection accounts can stay on your credit report for up to 7 years, plus 180 days after the date your account first became delinquent. 7
In most cases, debt collection agencies will report your debt because they believe that the stain on your credit will give you incentive to pay up. For this reason, debt collectors will sometimes even illegally re-age an account to make an old debt appear newer so that it stays in your credit history for longer.
Do collection accounts have to appear on your credit report to affect your credit score?
Yes, debts in collection must appear on your credit report to damage your credit score. Your credit score is calculated from the information on your report, which means that nothing that doesn’t appear on your credit report can affect it in any way.
How to deal with your debt collection agency
If you think you have a debt in collection but you don’t see any new entries on your credit report, you can find out what collections you have by contacting your original creditor or the debt collection agency that’s pursuing payments from you.
When dealing with debt collection, it’s important that you start by finding out which collection agency you supposedly owe by checking your credit reports and letters you’ve received about the debt. You can then search the agency’s name in this list of debt collection agencies to find out more about the company and how to contact them.
Once you’ve done that, you’ll be able to find out what debts you have in collection, verify whether the debt collector is legit, and either assert your rights or make arrangements to pay your collections.
How to minimize damage to your credit from collections
If your credit is suffering due to collection accounts, don’t worry. Even though it may take time, there are several ways you can rebuild your credit after collections, no matter how many points you’ve lost.
1. Pay off your collections
As mentioned, paying off your debts in collections is one way to repair the damage they’ve done to your credit. Even though your score won’t improve in every scoring model, even lenders that use older scoring models will look more favorably on paid collection accounts than unpaid ones.
Bear in mind that making partial payments can sometimes reset the statute of limitations on debt, giving debt collectors more time to sue you and obtain a court judgment forcing you to pay. Make sure that you carefully consider whether or not to pay debt collectors and only do so once you’ve committed to paying the full amount you owe.
2. Get collections removed from your credit report
You may be able to convince the debt collection agency handling your debt to remove collections from your credit report so that they stop hurting your credit score.
There are two main strategies you can use to get collections deleted from your credit history:
- Pay for delete: With this approach, you offer to pay your debt if the collection agency will delete the record of your collection account. Use a pay-for-delete letter template and send it to your debt collector.
- Goodwill deletion: While this is less likely to work, you may be able to convince your debt collectors to erase paid collections out of kindness. To do this, you’ll need to use a goodwill letter template and explain the circumstances that led to your delinquency.
Bear in mind that even after you get collections removed, the original charged-off account will still be on your credit report. You may also be able to remove the charge-off from your credit report and completely erase the negative effects of collections by sending a goodwill letter to your original creditor.
3. Practice good credit habits in the future
The most reliable way to fix your credit after damage from collections is to manage your debts well going forward.
This means practicing the following good habits when it comes to your credit:
- Keep up with your payments: It’s not just collections that hurt your credit—even one late payment can drag your score down. Maintaining a strong payment history is always the best thing you can do for your credit.
- Don’t overspend on your credit cards: Using too much of your available credit can hurt your credit by increasing your credit utilization rate (the amount of your credit that you’re using). Using too much credit can also make it hard to get out of debt and keep up with payments.
- Ask your creditor for help: If you’re in delinquency or default on one of your bills, contact your creditor as soon as possible to discuss your options. Creditors don’t like working with debt collectors either, and they may be able to offer a hardship assistance program or other accommodations to help you avoid collections.
You won’t be able to erase your bad credit overnight, but by following the tips above, you’ll be able to gradually improve your credit score over time and get your finances back in good shape, no matter how much collections have brought them down.
