How Debt Collection Affects Credit Scores

Having debt is common. Between student loans and credit cards, most people owe money in one way or another. Sometimes, our banks and creditors send the loan to a debt collection agency if we are behind on our debt payments. In these cases, a third-party agency is in charge of collecting the money owed, rather than the creditor collecting the money itself. Though this process often feels scary, there is important information to understand before setting up payment plans or taking the next steps. While debt collection may have a negative impact on your credit score, it may not be as bad as you expect. The two worst things you can do in response to debt collection are panic and ignore the problem. Remain calm while you educate yourself on the situation and formulate a plan.

The Length of Time Matters

Debt collectors often categorize debts into distinct categories based on how far overdue they are. A loan that’s only 30 days past due will have less impact than one that’s 180 days past due. If you decide to make payments to the collector, it’s best to start paying the loans that are the longest past due to have the best potential impact on your credit score. However, a debt’s impact on your credit score eventually diminishes over time. After seven years, the debt generally disappears from your credit score.

Improving Your Credit

One of the best things you can do for your credit if you have debt in collection is to ensure that no other loans end up in collection. Keep up to date on payments through your creditors. Set up automatic payments if you can; one late payment generally won’t send you to a debt collection agency, but it will negatively affect your score. Keeping a tight schedule surrounding loan payments ensures that your credit is as good as it can be with a debt in collection.

Paying Off Debt

One of the big questions surrounding debt collection is, “Should I pay off my collections debt?” The answer to this isn’t as cut and dry as it may feel. Whether you pay or not depends on your current financial situation. Like FICO and VantageScore, some credit reporting agencies ignore all debts in collection that have a balance of zero. This means paying off your debts may improve your score in the eyes of these companies. However, not all agencies ignore paid debts, and if a debt is old, it might not have a significant effect on your current score anyway.

Stay Safe

Keep your wits about you when dealing with debt collectors. Scammers often pretend to be debt collectors to scare people into giving them money. Remember that debt collection is federally regulated, and there are certain guidelines that these agencies must follow. Be sure to always ask for the agency’s name, the amount owed, and steps you can take if you believe the debt isn’t yours. A legitimate collection agency has to give you this information, and you can cross-reference it with your creditor.

For more loan help and information, contact Western Shamrock. We give a personal touch to loans and are here to answer any questions you might have.

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