Collection agency debt: Impact on your credit score

multiple words debt printed on a paper

Credit scores are extremely important, not only for getting mortgages, loans or higher credit card limits, but even if you’re looking for a job. Some employers have started taking a look at your credit score before they even consider to hire you. Because of this, many of us have made it one of our top priorities in terms of finances, to combat decreasing credit scores as much as we can.

Collection agencies, on the other hand, fight the same fight against us. At least, this is what it seems like most of the time. Seemingly every time we see a collection account on our credit report, most of us cringe a little, because we know that these accounts have an extremely negative effect on our credit score. Those accounts appear every time a collection agency reports debts to credit bureaus. If the debt is bad, the effect on our credit score is almost always devastating.

However, there are some ways to prevent those collecting accounts doing damage to your credit score. We want to dig into how exactly collecting agencies function, in order to give you an understanding of what you can, and hopefully will do, so your score doesn’t get affected by collection accounts.

Some bills are always considered bad debt

Imagine you’re visiting your doctor and after that, you have to pay the medical bill. You have the money, and it’s no problem for you to pay the bill at all. Normally, you would get the bill and pay the amount in the time frame given to do so. However, in this scenario, the medical bill goes through a collection agency first. Imagine how devastating it would be that the collection agency gets the medical bill before you do and has enough time to report a bad debt. What a crazy world that would be, right?

Except, it is this world. Almost half of all medical bills arrive to collector agencies before they arrive to the client who is supposed to pay it. The reason for this is simple. Medical bills are automatically transferred to collecting agencies. And, because they work fast in processing their inquiries, by the time you get your medical bill, it is already reported as bad debt. This problem is addressed by a huge number of people, so that the newest versions of credit score reports are excluding these kinds of medical bills as something that affects your credit score.

However, you should check if this is happening to you, and if it will to continue so in the future. If it happens, you have a right to complain about it and demand a revision of your credit score report version, so that in the future that doesn’t happen to you.

The amount of the collection debt is mostly irrelevant

This means that, if the debt is over $100, it doesn’t matter how much you owe, the debt is treated and affects your credit score the same way, regardless of how high the amount is. If, for example, you have a debt of $200 and it diminishes your credit score by 10 points, a debt of $100,000 would diminish your credit score by also 10 points.

The number of collection debt is also irrelevant

Credit scores are concerned with the timely manner of your payments for all collection debts. If you have just one collection debt of $100, and pay it off, you will see a credit score improvement. If you have 100 collection debts of $1 each, and you pay 99 of them, you won’t see an improvement if the last remaining one is more recent than the other 99 collection debts.

Paying off your collection debts doesn’t lower your credit score

Because of the things we explained in the last entry, many people think that the date of the collection debt that appears on our report has more significance than its current status. The rumor is that when you pay off a collection debt, the credit report will change for that particular debt from unpaid to paid. Since this change originated more recently and has to do with collection debt, many believe that it affects the credit score calculation process.

However, this theory is debunked and unconfirmed many times. Still, some people believe it to be true and that’s why they refuse to pay a particular collection debt until the moment they think is right to do so.

Removing a collection account is not improving your score

Another widely held belief is that if you settle and remove your collection account from your collection report, there might be a chance your credit score will be increased. The answer for this is NO, it won’t. And we have to ask here: why would it.

A collection account is not a credit card bill that will give you a better credit score if you pay it on time. The definition of collector accounts is an indicator of a failed payment. By settling and removing collection account from your credit report,you’re simply telling the financial institutions that you did what you should have done earlier. So settling and removing a collection account from your credit report is not going to increase your credit score. All it can do is prevent it from going down.

It’s not all mechanical, so don’t worry

All the things we describe here in regards to collection accounts and bad credit showing up automatically on your credit report make it seem as if we are living in some kind of dystopian world. The reality is, lenders, when reviewing your loan or mortgage application, know all the bad things collection account can do to your credit score. If they see that the collection accounts are the main reason for a bad decreased credit score, there’s usually no problem whatsoever.

Not everything is automated, so don’t worry if collection accounts start showing up on your credit report. Just know the meaning of it, so you can present your case if needed.