How to Raise Your Credit Score When You Have Collections

How Collections Affect Your Credit Score

A credit score represents an individual’s creditworthiness, indicating the likelihood of repaying borrowed funds. Lenders, landlords, and some employers use these scores to assess financial responsibility. Scores typically range from 300 to 850, with higher scores indicating lower risk. Maintaining a healthy credit score is important for securing favorable terms on loans, credit cards, and other financial products.

A collection account arises when a debt becomes significantly delinquent and the original creditor sells or assigns it to a third-party collection agency. They then attempt to recover the debt. Once a debt goes into collections, it appears as a derogatory mark on your credit report, which can significantly lower your credit score.

Credit scoring models weigh payment history as the most influential factor in calculating a score. A collection account is a severe negative entry in this history, signaling a failure to pay a debt as agreed. The impact of a collection can vary based on factors like the original amount, how long it has been on the report, and the overall credit profile. A collection account remains on a credit report for up to seven years from the date of the original delinquency, regardless of whether it is paid or not.

The distinction between an original creditor and a collection agency is important. An original creditor is the entity that initially extended credit or provided services. A collection agency is a separate business that purchases or is assigned these delinquent debts. Understanding who owns the debt is a necessary first step when attempting to resolve the account and mitigate its impact on your credit score.

Gathering Information on Your Collection Accounts

Before taking any action to address collection accounts, it is important to gather information about them. The primary source for this information is your credit report, which can be obtained from each of the three major credit bureaus: Equifax, Experian, and TransUnion. Federal law allows consumers to obtain a free copy of their credit report from each of these bureaus once every 12 months through AnnualCreditReport.com.

Upon accessing your credit reports, carefully review each one for entries related to collection accounts. Look for details such as the name of the original creditor and the collection agency, the account number, and the original balance of the debt. Also, note the current balance, the date the account was opened, and the date of last activity, as these dates determine how long the collection remains on your report.

It is also important to identify any discrepancies or inaccuracies on your credit reports. This includes checking for duplicate entries, accounts that do not belong to you, or incorrect dates of last activity. These inaccuracies can negatively affect your credit score and may provide grounds for dispute.

Documenting all identified collection accounts is an important preparatory step. Creating a detailed log of each collection account, including the bureau reporting it and any identified errors, will serve as a valuable resource. This organized approach ensures you have all the necessary data before engaging with collection agencies or credit bureaus to resolve these debts.

Strategies for Resolving Collection Accounts

Once you have gathered information about your collection accounts, you can begin to implement resolution strategies. One important initial step is debt validation, which involves sending a formal request to the collection agency to prove the debt is legitimate and that they have the legal right to collect it. This request, often called a debt validation letter, should be sent within 30 days of receiving the initial communication from the collection agency.

A debt validation letter should include your name, address, and the account number in question. You should ask for specific documentation, such as the original contract or agreement, proof that the debt was assigned or sold to them, and a detailed breakdown of the amount owed. If the collection agency cannot provide adequate validation, or fails to respond within a reasonable timeframe (30 days), they may be required to cease collection activities and remove the entry from your credit report.

Negotiating a settlement directly with the collection agency is another viable strategy once the debt has been validated. Many collection agencies are willing to settle for less than the full amount owed. When negotiating, aim for a “pay-for-delete” agreement, where the agency agrees in writing to remove the collection entry from your credit report in exchange for payment. While not all agencies agree to this, it is always worth asking.

Any agreement reached during negotiation, whether it’s a pay-for-delete or a settlement for a reduced amount, must be obtained in writing before any payment is made. This written agreement should clearly state the agreed-upon payment amount, the date by which it must be paid, and the collection agency’s commitment to update your credit report accordingly. Without a written agreement, there is no guarantee the agency will uphold their verbal promises, potentially leaving the collection on your report even after payment.

If you identify inaccuracies on your credit report, you have the right to dispute this information directly with the credit bureaus. You can initiate a dispute online, by mail, or by phone, providing any supporting documentation you have. The credit bureau then has 30 days to investigate your dispute with the furnisher of the information, which in this case would be the collection agency. If the information is found to be inaccurate or unverifiable, it must be removed from your credit report.

Paying a collection account in full is also an option. While paying a collection does not remove it from your credit report immediately, it changes the status from “unpaid” to “paid,” which can be viewed more favorably by lenders over time. Similar to settlements, always obtain written confirmation from the collection agency that the debt has been paid in full and that the account is considered closed. This documentation is important for your records and for disputing any future discrepancies.

Rebuilding Your Credit After Collections

After addressing collection accounts, the focus shifts to rebuilding your credit profile. Establishing a consistent pattern of on-time payments is important, as payment history accounts for the largest portion of your credit score. Ensuring all current and future bills, including credit cards, loans, and utilities, are paid by their due dates will gradually demonstrate financial responsibility and positively influence your score. Setting up automatic payments for recurring bills can help maintain this discipline.

Managing your credit utilization ratio is another important step in credit rebuilding. This ratio compares the amount of credit you are currently using to the total amount of credit available to you. Keeping this ratio low, below 30% across all your credit cards, indicates that you are not overly reliant on borrowed funds. Regularly paying down balances before your statement closing date can help maintain a low utilization.

Diversifying your credit mix can also contribute to a healthy credit profile over time. A mix of different credit types, such as revolving credit (credit cards) and installment loans (auto loans, personal loans), can signal responsible management of various financial obligations. However, it is important not to take on unnecessary debt solely for the purpose of diversifying your credit mix, as accumulating new debt can pose additional risks.

For individuals with limited credit history or those recovering from collections, secured credit cards offer a pathway to rebuild credit. These cards require a cash deposit, which serves as your credit limit, thereby reducing the risk for the lender. Responsible use, involving on-time payments and low utilization, is reported to the credit bureaus, helping to establish a positive payment history. After a period of responsible use, 6 to 12 months, some secured card issuers may convert the account to an unsecured card or offer an upgrade.

Credit builder loans are another tool designed specifically to help individuals establish or rebuild credit. With a credit builder loan, the loan amount is held in a savings account or certificate of deposit by the financial institution. You make regular payments on the loan, which are reported to the credit bureaus. Once the loan is paid in full, you receive the funds, and you have built a positive payment history. These loans are for smaller amounts, and repayment terms can range from 6 to 24 months.

Becoming an authorized user on another person’s well-managed credit card account can also provide a boost to your credit score. As an authorized user, the account’s payment history and credit limit may be reported on your credit report. This can be beneficial if the primary cardholder has a long history of on-time payments and low credit utilization. However, it is important that the primary cardholder maintains responsible credit habits, as their actions will also affect your credit report.

Finally, consistent credit monitoring is an ongoing practice that helps in maintaining financial health. Regularly reviewing your credit reports from all three bureaus allows you to track your progress and quickly identify any new inaccuracies or fraudulent activity. Many financial institutions and credit card companies offer free credit monitoring services, providing alerts for significant changes to your credit file. This proactive approach ensures that your efforts to rebuild credit are reflected accurately and that you can address any issues promptly.

Citations

https://www.experian.com/blogs/ask-experian/how-long-do-collections-stay-on-your-credit-report/
https://www.annualcreditreport.com/index.action
https://www.consumerfinance.gov/ask-cfpb/what-is-debt-validation-en-1361/
https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/dispute-errors/
https://www.investopedia.com/credit-builder-loan-definition-7501062