Having a collection on your credit report can be distressing. Collections can significantly impact your credit score, making it challenging to secure loans or get competitive interest rates. This guide aims to help you understand collections, how they impact you, and steps to potentially remove them.
What is a Collection?
When you have an unpaid debt that becomes significantly past due, the original creditor might sell that debt to a collection agency. Collections are typically reported to credit bureaus, appearing as negative entries on your credit report. These entries can include details about the unpaid debt, such as the original amount owed, the name of the creditor, and the status of the collection account.
Why is a Collection Damaging?
Collections are a sign of non-payment and can considerably decrease your credit score. Collections signal to potential lenders that you’ve failed to meet your financial obligations, raising concerns about your creditworthiness. This can result in higher interest rates, difficulty securing loans or credit cards, and even impact your ability to rent a home or land a job. Moreover, they can stay on your report for seven years, regardless of whether you pay the debt or not.
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What Does Going into Collections Mean?
Once a collection agency buys your account (or is hired by the original creditor to collect it), you might experience any of the following.
- A third-party debt collector may contact you. You may receive letters, phone calls, or both asking you to pay your debt. The debt collector may continue contacting you unless you ask it to stop, in writing.
- A new collection account may show up on your credit reports. First, you’ll have 30 days to dispute the validity of the debt if you disagree with it. Your original debt may also be updated on your credit report to a status of “charged-off.”
- The collection agency might sue you. This is the worst case scenario and, thankfully, it doesn’t always happen. But when you ignore a debt collector or refuse to pay, there’s a chance the debt collector might file a lawsuit against you. If you lose, the court could allow the collector to garnish your wages or levy your bank account.
If you can’t pay a secured debt, like an auto loan, you risk losing the asset that’s tied to your loan. For example, your auto lender might repossess your vehicle and sell it at auction. Any remaining balance could be sold to a collection agency after the fact.
Still, debt collectors have rules to follow. The Fair Debt Collection Practices Act (FDCPA) sets limits on what debt collectors are allowed to do. A debt collector can’t, for example, harass you or threaten to sue you unless it actually plans to follow through with legal proceedings.
Steps to Remove Collections from Your Credit Report
- Verify the Collection: Before taking any action, ensure the collection is accurate. Obtain your credit reports from the major bureaus – Experian, Equifax, and TransUnion – and verify the listed collections.
- Dispute Inaccuracies: If you find any discrepancies, such as a collection that doesn’t belong to you, file a dispute with the respective credit bureau. They’re obligated to investigate and respond within 30 days.
- Negotiate a “Pay-for-Delete”: Some collection agencies might agree to remove the collection entry from your credit report if you pay the debt. Ensure to get this agreement in writing.
- Settle the Debt: If “pay-for-delete” isn’t an option, consider paying off the collection. While this doesn’t remove it from your report, it will change its status to “paid,” which looks better to future creditors.
- Goodwill Deletion Request: If you’ve paid the collection, you can write a goodwill letter to the collection agency. In it, explain your past financial hardships and request a removal out of goodwill.
- Wait it Out: Collections will naturally fall off your credit report after seven years from the date of the original delinquency.
Frequently Asked Questions
- Does paying off a collection remove it from your credit report?
No, but it changes its status to “paid.” This looks better than an outstanding collection.
- How much does a collection impact my credit score?
The impact varies based on the rest of your credit profile. Newer collections have a more significant effect than older ones.
- Can I remove a legitimate collection from my report?
It’s challenging, but strategies like “pay-for-delete” or goodwill deletion requests can occasionally work.
- How long does a paid collection stay on your report?
A collection, whether paid or unpaid, can remain on your report for up to seven years from the date of the original delinquency.
Bottom Line
While removing collections can be a complex task, it’s essential for maintaining good credit health. Ensure to address collections head-on, either by challenging inaccuracies, negotiating with collection agencies, or simply letting them expire over time. By being proactive, you pave the way for a brighter financial future.
