Having a collection on your credit report can hurt your credit score to the tune of 100 points or more. Even when you've paid off the debt, a record of the collection will remain on your credit report, lowering the score. Collection agencies are under no obligation to remove that information. It is possible to negotiate with them, get the information removed, and raise the score, but it will take time.
A credit score is a shorthand summary of your credit history from the past seven years. Every time you borrow money, the lender will report it to one or more credit bureaus. If you miss a payment or are late by as little as a day, the lender will report this to the bureaus. The bureaus compile this information into a credit report to tell other lenders how credit-worthy you are. To make it easier for lenders, the bureau summarizes all of that information into a single three-digit number. This is your credit score.
Calculating Credit Scores
Each credit bureau calculates its own credit scores using a slightly different formula. The exact formulas are kept secret, but we do know what sort of information goes into the calculation and how it's weighted. Repayment history makes up approximately 35% of your credit score, while 30% of the score reflects your total debt. Another 15% is determined by the length of your credit history and 10% reflects the number of new credit applications. The remaining 10% is determined by multiple factors, including types of credit.
Improving Your Credit Score
The best way to improve your credit score is to keep up with repayments. A single missed payment is enough to damage a long-standing credit history. Several missed payments will hurt your credit score for years to come. It's almost impossible to remove missed payments from your credit report, though as time progresses, they'll matter less. Once the lender passes your account onto a collection agency, this will go on your credit report. Paying off the debt will not erase it from the report. You'll have to negotiate with the credit bureau to get this done.
Negotiating With the Collection Agency
The collection agency has a single goal: to get you to pay your debt. You can use this to negotiate with the agency to get the collection removed from your credit report. Offer to pay your debt in full in exchange for the agency agreeing to remove the collection from your credit report. Make sure you get this in writing and that it specifically says that they will remove all record of the collection. This is not the same as reporting the debt as settled. A settled debt will stay on your credit report for seven years. Instead, you want it removed completely.
Most lenders report to credit bureaus every 30-90 days. Your credit score will not change quicker than that. Even once the collection has been removed, your score may not improve significantly. The repayment history that led to your account being passed on to the collection agency will still be there. It will take a couple of years of making payments month after month to raise the score by 100 points. The exact time frame depends on many factors, including your current credit score and the rest of your credit history. It takes as little as 30 days to destroy your credit score and years to build it back up.
- Comstock/Comstock/Getty Images