How Debts in Collections Affect Your Credit

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An emergency medical situation pops up. You’re hit with an unexpected car maintenance repair. Maybe you need to expense something on a credit card that you can’t quite afford.

One way or another, life got in the way of your ability to pay off some financial obligation. That past-due bill went unattended for a little too long… and now your debt is in collections—don’t panic, help is near.

Read on to learn how much a debt collection affects your credit score, why it matters, and what you can do to help your credit score recover.

Click on a frequently asked question below to get the quick answers you need, or read your way through to ensure you cover all your bases on debt collection.

What is “collections”?

Collections—otherwise known as debt collection agencies or simply debt collectors—are usually third party organizations who attempt to pursue payments on past-due debts owed by individuals or businesses.

The lending company itself may also have their own division or subsidiary which pursues debt in collection, but some creditors hire an outside debt collector after multiple failed attempts are made to collect its receivables.

How does debt collection work?

The debt collection process usually follows these steps:

  1. A borrower defaults on their payments and falls behind in their amount owed.
  2. If payments are still not received and a borrower becomes significantly delinquent on a debt, the past-due account is sent to collections, either in-house or outsourced to a credit collection agency.
  3. The borrower may or may not be notified that the account has been sent to collections.
  4. A debt collector will contact the borrower in default, usually with a written request.
  5. If the borrower does not cover the overdue account, the collector may update the borrower’s credit report to reflect a missed payment, and indicate that the account has been sent to collections.
  6. Debt collection credit reporting may lead to a drop in the borrower’s credit score.
  7. The consumer’s credit score may continue to suffer until the overdue balance is paid in full or the collection account reaches the statute of limitations.

A credit score drop resulting from a debt in collections can have a major impact on your future financial plans. You might be denied a loan, lease, or credit card based on a low score—especially if the debt in collection is still unpaid.

While you determine how to address your account in collections, make sure all of your other outstanding accounts are paid and up-to-date.

When is debt sent to collections?

When debt is sent to a collection agency—and the time at which your debt collection credit score takes a hit—will vary depending on the original creditor.

If you ignore a creditor’s letters and phone calls, you’re can’t work out an agreement to either settle or repay the debt in full, or you fail to make payments using a repayment schedule, your bill may be turned over to a collection agency.

According to Nolo.com, the delinquency will show up in your credit report anywhere from three to six months after you’ve defaulted on a payment.

How long can a debt be collected?

The statute of limitations set by the Consumer Financial Protection Bureau (CFPB) states that a debt may remain in collection between three to six years from the date of the first default payment.

The CFBD notes that these limits can vary between state jurisdictions. For example, in some states the statute of limitations on debt collections may begins on the last day a partial payment in made, whereas in other debt collectors may still try to pursue payments after the limitations have passed, so long as they adhere to the Fair Debt Collections Practices Act (FDCPA).

It’s recommended to speak to experienced attorney in your state who understands local legislation regarding debt collection.

Does paying off debt collections improve your credit score?

Paying down your debt may improve your credit score. Lessen the effect of your collections credit score by diligently making payments on the overdue account—even submitting the minimum payment required can show that you are serious about repaying your outstanding financial obligations.

No one enjoys receiving nagging phone calls from debt collectors who may pressure you to pay back money owed, but try not to take out your stress and frustration on the person who’s on the other line of the phone.

In the meantime, make timely payments on all other accounts to help improve your damaged credit score and help ensure your report takes no additional hits.

How to monitor your credit score

The best way to avoid a debt in collections affecting your credit score is, of course, to avoid the debt in the first place—but as we know, this isn’t always possible when times are tough.

Option B is to keep track of your credit score—before restoring its health seems nearly impossible. If you miss any warning letters about a debt sent to collections, or don’t know at which point to take them seriously, Turbo can help.

We’ll alert you the moment your credit report changes so you can investigate the debt in collection, fight it, or pay it off.

Best of all? The service is completely free. Anyone can get insights to their financial health—not just those in collections—so get started today.

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