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What to Know if You Have Collection Accounts and You Want New Credit

If you’re getting calls from debt collectors about unpaid credit cards or other bills, you might be wondering how these collection accounts will affect your credit score. Generally, a more recent collection account will do more damage to your FICO score.

Newer scoring models ignore paid collections. But lenders may not, and paying could improve your odds of approval when you want a mortgage or an auto loan.

Here’s what you need to know about paying collection debts, including reasons to pay off a collection account and what can happen to your credit if you do.

What Is a Collection Account?

If you fall behind on payments, the creditor might send the debt to a collection agency or sell it to a debt buyer. This may happen a few months after you start missing payments or not paying the minimum amount.

You will usually receive letters or calls from your credit card company or lender to warn you before your debt is sent to a collection agency. When your debt is sent to collections, you are still legally obligated to pay it.

Debt collectors can make calls, send letters, emails or text messages, and even use direct messages on social media to reach you about money you owe.

How Will a Debt in Collections Affect Your Credit?

A collection account can hurt your credit score, but the extent of the damage depends on where your score was before the debt was sent to collections.

“The better your score, the more significant the drop will be,” says Leslie Tayne, a financial attorney and founder and managing director of New York’s Tayne Law Group. “If you have a 740 credit score, you will see more of a drop than someone with a 640 score because there is more room for the numbers to fall.”

Debt collectors can report collection accounts to one, two or all three credit bureaus. Collections typically stay on your credit report for seven years from the original delinquency date, or the first late payment in a series.

A collection account hurts your score the most right after it is reported and when the debt collector is actively pursuing payment, says Nathalie Noisette, founder of credit repair company Credit Conversion. “Fortunately, the impact does fade over time,” Noisette says.

If you are paying other credit cards and bills on time, this will bolster your credit score in spite of collection debt, Noisette adds. “That can counteract the negative impact,” she says.

Can Your Credit Improve if You Pay Your Collection Account?

Paying off a collection account will note the account as “paid” on your credit report, but the effect on your credit depends on the scoring model. Some credit scoring models ignore $0 balance debt collections and treat certain types of debt different from others.

If you pay the account, it won’t be removed from your credit report, though.

Here’s what to expect from the most recent credit scoring models:

  • VantageScore 3.0 and 4.0 ignore paid collection accounts and medical debts directly reported by a medical facility or service provider.
  • FICO 8, 9 and 10 ignore collections less than $100.
  • FICO 9 and 10 ignore paid collection accounts, and unpaid medical collections have less effect than in previous versions.

Any third-party collection is considered negative in scoring models older than FICO 8.

What Are Your Debt Collection Rights?

A federal law called the Fair Debt Collection Practices Act limits what debt collectors can do and offers protection from abusive, unfair or deceptive collection practices. The law covers auto and student loans, medical bills, and credit card, mortgage and other household debts, but not business debts.

Here’s what debt collectors can and can’t do by law:

  • They can’t contact you at any time or place. Debt collectors can’t contact you before 8 am or after 9 pm unless you say it’s OK. They can’t contact you if you put in writing for them to stop, and they can’t contact you at work if you tell them you can’t get calls there.
  • They must provide information to validate your debt. This includes the amount you owe, the creditor’s name or how to get it, and what to do if you think the debt is not yours.
  • They can’t discuss your debt with anyone but you or your spouse. If you’ve told the debt collector that an attorney is representing you, the debt collector must contact the attorney.
  • They can’t repeatedly call you. A debt collector can’t call you more than seven times within a seven-day period or within seven days after having a phone conversation with you about a particular debt.
  • They must follow certain rules to reach out on social media. Messages must be private, debt collectors must identify themselves, and they must offer a way for you to opt out of receiving communications.
  • They can’t harm you, lie to you or treat you unfairly. Debt collectors can’t threaten to hurt you, use obscene language or repeatedly call to harass you. They can’t demand that you pay more than what you owe or pretend to be someone else, such as an attorney. Debt collectors also can’t publicly reveal your debts by sending postcards or putting information on envelopes.

When to Pay Off a Collection Account

Paying a collection account won’t immediately heal your credit but can offer other benefits. You may want to pay off a collection account to:

  • Avoid a lawsuit. The debt collector could sue you for the money you owe if your debt hasn’t passed the statute of limitations. Paying your account can help you avoid a lawsuit and wage garnishment.
  • Prevent additional charges. You can minimize interest charges and other fees permitted by law or the original creditor agreement.
  • Prepare to qualify for a loan. A lender may expect you to pay off a collection account before approving a loan. “If you’re trying to acquire a mortgage, removing or paying off a collection account is vital since the No. 1 factor lenders are looking at for approval is your payment history,” Noisette says. Medical collections do not need to be paid for FHA loan approval, but your lender may require this.

How to Improve Your Credit Score After a Collection

With some effort, you can overcome the damage of a collection account. Some steps to take:

Dispute errors. If a collection is not yours or is reported incorrectly, you can dispute the error with the credit bureaus. The credit bureaus have dispute forms on their websites. You can also refer to the Federal Trade Commission’s sample dispute letters. Bureaus have 45 days to investigate and then notify you whether they will update or delete information from your credit report.

Get some positive information on your credit report. Pay other credit cards or loans on time. If all of your accounts were sent to collection and you’re struggling to get credit, you may need to open a secured credit card.

Be patient. Your credit score should start to improve as you regularly pay your accounts on time and practice other good credit habits, such as keeping balances low. Also, hang tight if your account is nearly 7 years old because the account should fall off your credit report soon.

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