Having debt in collections means two things. First, you failed to make good on a promise to pay someone. Second, and more importantly, your credit score is significantly impacted as a result. Unfortunately, simply paying the debt isn't enough to salvage your credit score, which could take a hit for years to come.
How Credit Scores Work
There are many different credit scoring models, but they all place a high priority on your payment history -- that is, how often you've paid late -- and the amount of debt you have in relation to your credit limits. According to the FICO model, the most popular scoring model on the market, these two criteria comprise two-thirds of your credit score. Having an account in collections means you've failed in both of these areas.
Impact of Debt Collection
Even if your other accounts are stellar, having one account in collections may be all it takes to torpedo your credit score. After all, the higher your credit score, the more you stand to lose. While there is no set amount of points that you'll be dinged for having an account go to collections, it's considered more serious than an average past due account -- and FICO scores can drop as much as 160 points for a single late payment.
In addition to seeing a downward spike in your credit due to a collections account, there are other penalties to pay. You'll face harassment from collection agencies who want to get paid as soon as possible. You'll also have to deal with having the collections listed on your credit report, where it will stay for up to seven years. And, of course, you must actually make payment on the account for which you're delinquent.
How to Respond to Collections Activity
If you get a notice about an account going into collections, take action right away. You usually have 30 days before your debt is considered valid and, therefore, reported to the credit bureaus. Take advantage of this opportunity to get things straightened out before you face the real penalties.
If you already have collections on your credit report, you can ask the collections agency if they'd consider a "pay for delete." In this arrangement, you pay the debt in full, and perhaps a little extra, in exchange for the agency taking the negative mark off your credit report. There is no obligation for the collection agency to remove the mark, and they may not be allowed to do so, but it's a question worth asking if you find yourself in trouble.
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