Chris Bridges, Founder and CEO, VITAL Card Inc.
Also referred to as collections, debt collectors are often persistent in their attempts to collect on a debt. They may contact you by phone, mail, or even in person. But does paying off collections help you financially? And will your credit score go up if you pay them off?
Let’s dive into what you should know about how debt collectors impact your credit score.
What exactly are collections?
Collections consist of individuals or businesses who collect overdue payments on behalf of creditors. They typically contact debtors through letters, phone calls, or text messages and may also visit their homes or places of business.
In some cases, collection agencies may resort to more aggressive tactics, such as threatening legal action or wage garnishment. The Fair Debt Collection Practices Act (FDCPA) protects American consumers by preventing unfair or abusive practices among debt collection agencies.
Under federal law, collections are prohibited from using harassing or threatening behavior, making false statements, and engaging in other unlawful practices when collecting a debt. They cannot make multiple contacts with a debtor after being asked to stop, except to provide certain updates or notifications.
In addition, a debt collector is not allowed to contact you at unreasonable times, such as early in the morning or late at night.
How and when does a debt end up in collections?
A debt typically goes to a third-party collection agency when the debtor has failed to make payments for an extended period. The exact length of time could vary based on the type of debt and the creditor involved, but it is typically around six months.
Creditors may sell a variety of unpaid debts to collections, including phone bills, auto loan debts, and credit card debts. When a collection agency buys a debt, the original creditor will report the account as a charge-off.
This means that they have given up on collecting the debt and recorded the account as a loss. In many cases, creditors may also report the debt to credit bureaus, which could negatively impact the debtor’s credit score.
Once a debt is in collections, the collection agency may try to collect the debt from the debtor directly. At this point, the collections agency may send a notice in writing to the debtor, demanding payment and indicating that failure to pay may result in adverse repercussions, such as wage garnishment or legal action.
What can I do to prevent my debt from being sent to collections?
Keeping up with your payments is crucial to avoid having your debt go into collections. If you’re only making minimum payments, it’s going to take longer to pay off your debt, and you may eventually fall behind.
Track your spending to ensure you only use credit for things you can afford. This can help you keep your balances low and avoid accumulating too much debt.
Pay your bills on time each month to avoid late fees and additional charges. These penalties can add up fast and make it more challenging to pay off your debt.
Additionally, if you are having trouble making ends meet, contact your creditors. You may be able to work out a payment plan that works for both of you. By taking these steps, you can lower your chances your debt will be sent to collections, and more actively manage your finances.
How can I know if I have a debt in collections?
If you think you might have a debt in collections, there are a few ways to find out. First, check your credit report. Using AnnualCreditReport.com, you can obtain a free copy of your report once a year from each of the three major credit bureaus: TransUnion, Equifax, and Experian.
Any debts that are in collections should appear in your credit report, along with the name of the collection agency and other relevant information. You can also contact the collection agency directly. Most agencies will send a notice or letter before they start calling, so this may be your first clue that you have a debt in collections.
The notice should include the amount of the debt and how to pay it. If you need clarification on whether or not the notice is legitimate, you can check with the original creditor (i.e., the company you originally owed money to) to confirm that the debt has been turned over to collections.
Finally, if you think you have a debt in collections but can’t find any information about it, try contacting a consumer law attorney or credit counseling service. They can help you figure out what’s going on and your options for dealing with the debt.
What should I do if my debt is in collections?
Make a list of all the collection accounts. Then find out the details of each account, including the name of the creditor, the amount owed, and the date of the last activity. Armed with that information, you can start working on a strategy to pay off the debt.
Here are a few options:
- Negotiate with the creditor for a lower payoff amount. This may be possible if you can show that you’re in a place of financial hardship or if the debt is old and unlikely to be collected.
- Set up a payment plan with the debt collector. This will usually involve making regular payments until the debt is paid in full.
- Pay off the debt in one lump sum. This may be difficult if you don’t have a lot of savings, but doing so can prevent interest charges from adding up.
Whichever option you choose, it is generally recommended to get everything in writing from the collections agency before making any payments. Once you’ve paid off the debt, ask the agency to send you a letter confirming that the debt is settled and that your account has been closed. Keep this letter for your records.
How To Dispute an Inaccurate Collection Account
If you have a collection account that you believe is inaccurate or unfair, consider opening a dispute to challenge the account with the credit bureaus. To do this, you will need to send a written dispute letter by certified mail to the credit reporting agency.
In your letter, include your contact information, an explanation of why you’re disputing the account, and documentation to support your case. Make a copy of your documents for your own recordkeeping. The credit bureau’s investigation typically lasts 30 days.
If the agency needs additional evidence, they will contact you for the necessary supporting materials. And if the credit bureau rules in your favor, they may correct your credit report, then send you their findings in writing along with a complimentary copy of your credit report.
How many points will my credit score increase when I pay off collections?
Collection accounts and unpaid debts can stay on a borrower’s credit report for up to seven years, making it difficult to get approved for new loans and lines of credit. In most cases, paying off a collection account won’t remove it from your credit report or immediately increase your credit score.
Despite this, your score may gradually improve over time. That’s because when you pay off a debt, the account status changes from “unpaid” to “paid.”
This positive information can help offset the negative impact of the collection account — future potential creditors will see that you have taken responsibility for the debt and paid it off in full.
At this time, it is impossible to calculate the number of points your score could increase since different scoring models have distinct criteria. In addition, other factors impact your creditworthiness, such as your credit utilization and the length of your credit history.
It is worth noting that specific scoring models, such as FICO Score 9, put less or no weight on medical debts that have gone to collections. FICO Score 9 and VantageScore 3.0 and 4.0 do not penalize paid collections accounts when determining a borrower’s score.
As a result, if you have entirely paid off an overdue debt that your creditor sent to collections, some modern scoring models will not consider this negative mark.
The bottom line on debt collectors and your credit score
You are entitled to rights under federal law if a debt collector contacts you.
For example, the Fair Debt Collection Practices Act (FDCPA) prohibits collections from using abusive or misleading tactics when collecting a debt. The law also requires debt collectors to provide you with specific information about the debt they are trying to collect.
While paying off collections may help increase your credit score, the results won’t be immediate. Similarly, the paid account does not guarantee an improved credit score.
This is because you still need to manage other aspects of your finances responsibly, such as making on-time, minimum required payments on other types of debt.
Still, for those looking to improve their scores, paying down any outstanding debts should undoubtedly be part of your overall personal finance plan.
Looking for more helpful articles to help you manage your credit score? Explore VITAL’s wealth of financial resources here.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.