Credit reports and scores are sensitive to what may seem like minor issues and it’s important that consumers understand the weight of a ‘minor problem’ on their credit so they can avoid damage to their score.
What is a collection: Collection accounts are generated when a consumer either refuses to pay or is not aware of a bill and it goes unpaid for an extended period. Whether the bill is justified or not, the creditor might sell or lend the account to a collection agency. Collection agencies are third party organizations who purchase or borrow debt from the original creditor. They make money by collecting more than what they paid for the debt or gaining a commission on the amount they collect from you. A collection account can be placed on credit reports for something as minor as not paying a $50 medical co-pay.
Collection agencies usually update the consumers credit profile to show the debt owed. This can reduce scores hundreds of points depending on how high the scores are in the first place or when the collection is placed. The higher the score, the more impact a new collection will have. If the collector does not receive payment on the debt it can be passed from one agency to another causing many negative updates on the credit reports, therefore causing greater damage to the scores. By law, collection agencies can report accounts they are collecting on to the debtors credit bureaus in order to gain leverage. Having a collection account on your report reflects poorly on your score since it indicates that you were over 150 days past due on a payment , and can remain on your credit report for 7 years.
Medical collections, for example, are a common cause of credit score reductions since many very responsible consumers expect their health insurance to cover the costs of service and send payment in a timely manner to the physician. Sometimes the physicians billing department makes an error as well and the health insurance company may not receive the claim, kicking the outstanding invoice back to the insured. Once the insurance claim is made it is normal to forget about it thinking all is well. When a thin letter arrives in the mail with an unrecognizable return address many people shred it thinking it’s junk mail. Months go by and what wasn’t covered by the insurance company is now a collection being updated on credit which can easily cause an excellent 780 FICO score to drop down to a 680 or less. This could mean a much higher rate or a rejection for financing.
There are many situations that could cause your score to drop that some people might not think of, for example:
- An individual finds they are leaving a roommate situation early or a couple is splitting and the person leaving neglects to take their name off the cable or FIOS account. Later the bill is left unpaid by the user of the service and the collection is updated on the account holders credit.
- Once an account is closed if there is an outstanding fee that was generated later on with the utility company if a new address is not given to the service provider and the final bill is generated the invoice will never be received by the account holder who has moved out.
- You receive merchandise from an online vendor and it is damaged. You have a hard time getting the company to recognize the damage happened before you received the merchandise. You send back the merchandise and ignore the companies invoices. It becomes a collection down the road.
These situations occur often and most of us just don’t realize how much this can cost us. In most cases we are able to fix these problems. If you are in a situation like this do not rush to pay the collection until you speak with one of our experts.
What to do when you have collection account(s) reporting:
The amount of debt owed holds no bearing on the impact it will have on credit scores. Even a $10 collection account can hurt scores 100+ points.
If you find that a bad debt is hurting your credit, it’s important that you speak to someone with experience in credit reporting. Many people who find out a debt is reporting jump to pay off the debt because they believe that settling the account will remove the delinquency. This is far from the truth. Collection accounts can remain on your credit report for up to seven years, whether it’s paid or not. Legally a creditor must update the account to paid but that will not help restore the damage to your credit scores. In fact, sometimes paying the debt can make it even harder for a credit repair company to remove the negative account early.
When a consumer becomes aware of negative information damaging their credit scores, it’s best to pull all three reports and scores to review them with a credit expert before deciding to pay off the debt or contact the creditor/collection agency. As mentioned above, consumers can cause more damage by contacting the credit and admitting to the bad debt, this confirmation can make it impossible to remove the information early.