How Do Debt Collections Impact Your Credit?

Writer and editor - Lauren Ward | Updated on 2023-02-19

Having an account sent to collections isn’t the end of the world, but it does affect your credit. Here’s everything you need to know about debt collections and what they mean for you.

Debt Collection Explained

If you’ve become significantly behind on a debt payment, your account may end up being sent to collections. This happens when your creditor sells your debt to a collection agency, often for pennies on the dollar. Other times, the creditor may have its own internal debt collections team. Either way, you may start getting more aggressive letters and phone calls trying to get you to pay.

The amount of time you have until an account is sent to collections varies depending on the creditor. Check your terms of agreement for your credit card or bad credit loan to find out what time frame you have. In most cases, unpaid accounts are usually sent to collections after six months of non-payment. You should receive a final notice telling you that your account is going to collections so you have one last chance to get a payment together.

Negotiating Your Debt

Once your account goes to collections, you actually have a bit of negotiating power. The collection agency only makes money if you pay them, and since they probably bought your debt for much less than you owe, they’re probably willing to settle for a smaller amount. Older debt is definitely easier to negotiate than accounts that have just gone to collections. It may be worth trying, but your odds increase the longer you’ve had that outstanding debt.

Although debt settlement can hurt your credit score, it could potentially help your finances in the long run. If you’ve had trouble keeping up with your debt payments, you could agree to make lower payments over a longer period of time to pay off your existing debt. Alternatively, if you have some cash saved up, you could offer a single lump sum to settle the entire account.

When you do come to an agreement with a debt collector, be sure you get all of the details in writing before you make any payment. This protects you in case they claim different terms from whatever you agreed on over the phone.

How Debt Collections Affects Your Credit Score

Your credit score first starts to decrease when you fail to make payments on your account. Creditors can report late payments at the 30, 60, 90, and 120 day marks. Once it’s sent to collections, the account will be marked as such on your credit report, which can further hurt your score. A fresh collections account can diminish your chance of getting approved for financing such as credit cards and bad credit loans.

When you settle the debt, it’ll still be marked as settled on your credit report, but that’s generally better compared to an unpaid collection account. If you have particularly strong negotiation skills, you could try and have the listing totally deleted from your credit report as part of your payment agreement. Again, you need to get this in writing to ensure it actually takes place.

Going through the debt collection process can be a harrowing experience. But if you have the ability to negotiate efficiently, you can minimize the phone calls and letters and still end up in a better situation than you started out. It’s always better to tackle the situation in anyway you can, rather than putting it off for one more day. Figure out what you can afford and make an offer so you can start fresh and work on recovering from this financial slip-up.

Lauren Ward

Lauren Ward
Writer and editor

Specializing in original, well-researched web content, including blog posts, news articles and web copy. Areas of expertise include personal finance and lending. 10 years of experience as freelance writer and working at Federal Reserve Bank of Richmond.
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