When you miss several payments on a debt, such as a credit card or loan, the lender may send your unpaid debt to a collection agency—a third-party company that collects money owed on overdue bills. This creates a collection account, one of the most damaging entries that can appear on your credit report, often leading to a significant drop in your credit score.
But while having a history with a collection agency can hurt your credit, it’s not the end of the road. This article will help you understand what collection agencies are, how they affect your credit score, and most importantly, how to improve credit score after going to collections.
What is “collections?”
You might hear someone say casually, “My medical debt went to collections.” What they mean is, a collection agency was brought in to try to get that debt repaid. A collection account is created when a creditor—such as a credit card company, lender, or utility provider—writes off your debt and transfers it to a third-party collection agency. This usually happens after several missed payments, typically 180 days after the initial delinquency.
Once the debt is in collection, the collection agency reports it to the credit bureaus (Experian, TransUnion, and Equifax). This collection account then appears on your credit report, signaling to potential lenders that you failed to pay a debt in the past.
How many points does your credit score go down with a collection?
When a debt goes into collections, it can cause your credit score to drop significantly, and the number of points depends on your credit history and the amount owed. According to FICO, payment history makes up 35% of your score and is a major factor in its calculation. The impact is greater for individuals who previously had a higher credit score, as the drop is more noticeable.
Recent collections hurt your credit score the most, as they signal to lenders that you’ve defaulted on a debt recently. Even if you eventually pay off the debt, the account remains on your credit report for up to seven years from the original delinquency date. However, the effect on your score can lessen over time as you work on rebuilding your credit.
In addition, collections are a red flag for future lenders, indicating that you’re a higher-risk borrower. This makes it much more difficult to get approved for loans, mortgages, or new credit cards. Even if you are approved, you’re likely to face higher interest rates or less favorable terms.
How to rebuild credit after collections
If you’re wondering, “Can I rebuild credit if I have collections?” the answer is yes! Rebuilding credit after collections can feel overwhelming but with a strategic approach, it's entirely possible.
1. Verify the accuracy of the collection account
Ensure the information on your credit report is accurate. Collection accounts may sometimes have errors, such as incorrect balances or accounts that have already been paid.
Get a copy of your credit report from major credit bureaus and review the details of your collection accounts. If you find an error, file a dispute with the credit bureau. Include any supporting documentation to have the inaccurate collection removed or corrected.
2. Pay off or negotiate collections
Paying off your collection accounts can have a positive impact on your credit score, but it's important to approach it strategically. You can choose to pay the full amount owed, which may have the most immediate effect on your score. Alternatively, you could negotiate a settlement, where the creditor agrees to accept a portion of the total debt in exchange for marking it as “settled.”
When negotiating, you may be able to get more favorable terms, such as reduced amounts or extended payment plans. While settling a debt is generally better than leaving it unpaid, note that it may still leave a negative mark on your report, even if it’s a smaller one.
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3. Get a “pay for delete” agreement
Do collections show up on credit scores? They normally do, but while negotiating, try a “pay for delete” agreement. It’s a strategy where you negotiate with a creditor to remove a collection from your credit report in exchange for payment. Be sure to get the agreement in writing before making any payments to ensure they honor the deal.
4. Establish new credit lines
Rebuilding your credit after collections often involves establishing new, positive credit activity. Opening new credit lines shows lenders that you can responsibly manage debt. However, after collections, it can be challenging to get approved for traditional credit cards or loans. This is where secured credit cards and credit-builder loans can help:
- Secured credit cards are designed for people looking to improve their credit. These cards require an upfront cash deposit, which acts as collateral. As you use the card and make on-time payments, your activity gets reported to the credit bureaus, helping improve your credit score over time.
- Credit-builder loans function similarly, offering you a chance to establish a history of consistent payments. You don’t receive the loan upfront, but instead, the amount is placed into a savings account, which you can access after making all your payments. Both of these options are effective ways to begin rebuilding your credit if handled responsibly.
Limit the number of credit applications you submit, as multiple hard inquiries in a short period can temporarily lower your credit score. Focus on a few well-suited options and manage them wisely.
5. Keep a positive payment history
Even if you have collections on your report, you can steadily rebuild your credit by consistently paying all your current bills on time. Payment history makes up a significant portion of your credit score, so making punctual payments will slowly but surely boost your score. Focus on keeping your existing accounts in good standing. This includes any installment loans, like car payments or student loans, and revolving credit accounts like credit cards. To ensure you never miss a due date, set up automatic payments or reminders.
How long does it take to rebuild credit after collections?
Rebuilding your credit after collections is a gradual process and can take several months to years, depending on various factors. A credit score increase after a deleted collection is expected, but on average, you may start seeing improvements within three to six months of taking positive actions.
However, fully recovering from collections and achieving a higher credit score could take anywhere from 12 to 24 months or even longer, especially if the collection account is still relatively recent.
Several factors can influence the speed at which your credit score recovers:
- Age of collection account: The older a collection account is, the less it impacts your credit score. Recent collections, however, can continue to weigh heavily on your score.
- Paying off collections: While paying off collections can help improve your score, the effect may not be immediate. The action of paying off or settling collections is positive, but it may take time for the score to reflect that improvement.
- New positive credit activity: Opening secured credit cards or credit-builder loans and consistently making on-time payments can expedite the recovery process. Positive credit activity will gradually replace the negative impact of collections over time.
- Disputing inaccuracies: If any collections were reported in error, disputing and removing these inaccuracies can lead to a faster credit score improvement.
Bottom line
Rebuilding your credit after collections is a challenging but achievable process. By following key steps—verifying the accuracy of collection accounts, paying off or negotiating with creditors, pursuing a “pay for delete” agreement, establishing new credit lines, and keeping a positive payment history—you can steadily improve your credit score.
The path to recovery requires patience and persistence, but every positive action you take will help you regain control of your financial health. While results may take time, staying proactive and committed to good credit habits will ultimately lead to long-term credit score improvements.
FAQs
Will my credit score improve if I pay off all my debts?
Paying off your debts, including those in collections, can have a positive impact on your credit score. While it won't immediately erase the past negative marks, it shows lenders that you are responsible. Over time, this can lead to improvements in your credit score as your overall credit profile improves.
Is it worth it to pay off collections?
Yes, it is generally worth paying off collections. Doing so can prevent further damage to your credit score and may also improve your credit report over time. Paying off collections shows that you’re taking responsibility for your debts, which can be beneficial for future credit applications. Additionally, settling collections can sometimes lead to the removal of the collection account from your credit report, depending on the agreement.
How much will my credit go up if I pay a collection?
The impact on your credit score from paying off a collection can vary. It depends on factors such as the amount of debt, the age of the collection, and your overall credit history. While paying off a collection won't instantly boost your score, it will contribute positively over time. Typically, you might see a gradual improvement as other aspects of your credit profile also get stronger.
How to rebuild your credit after collections?
To rebuild your credit after collections, start by verifying the accuracy of your credit report and addressing any errors. Pay off or negotiate your collections, consider getting a “pay for delete” agreement if possible, establish new credit lines with secured credit cards or credit-builder loans, and keep a positive payment history on all your accounts. Consistent and responsible credit behavior will help in rebuilding your score.
How to remove paid collections from credit reports?
Removing paid collections from your credit report can be challenging, but it’s possible through negotiation. While not guaranteed, you can request a “pay for delete” agreement with the creditor, where they agree to remove the collection from your credit report upon receiving payment. Additionally, ensure all your accounts are accurate and up-to-date when disputing any discrepancies with the credit bureaus.