Can Debt Collections Affect Your Credit?

Missing a bill here and there doesn’t seem to be such a big deal, but if you forget about a bill for a long period of time it can be harmful!

That forgotten-about bill will get sent to collections. These debt collectors will alert credit reporting agencies about your delinquent payments which ultimately lower your credit score. 

Those same debt collectors will also begin to send notices and call your associated phone numbers.

Maybe you’re thinking these collectors aren’t the end of the world and you’ll just pay the bill eventually...no big deal! Will debt collections really affect your credit? 

Yes! Collections that are unpaid can have a negative effect on your credit score. An account that ends up in collections may make a dent in your credit and late payments can significantly hurt your score. Collections generally remain on your credit report for seven years past the date they become delinquent. 

Fortunately, it is still possible to buy a home in these circumstances depending on how much money you owe and what type of debt it is.

What kinds of debt are sent to collections? 

Not all debts will be considered the same. 

Debts like credit cards, student loans, medical bills, or personal loans are always sent to collections if they are delinquent. 

This is not the case for mortgages though. When you miss a payment on your house, you’ll get a notice from your lender and probably a few phone calls. If you miss another payment, depending on your lender, you’ll receive a warning letter of foreclosure. This debt will not go to collections, but you will lose your home and default on the loan which will make it very difficult to qualify for another loan. 

The same is true for car loans. If there are many missed payments, this will result in repossession, not collections. So, you will get your car taken away and depending on the state you may be responsible for the balance of your loan after it goes to auction. 

When do collections get reported to the credit bureaus? 

Your missed payments are not recorded immediately as something that went to collections. Initially a late payment is recorded after a full 30 days passed the due date and it will be recorded on your credit report as a “late payment.”

This will give you the opportunity to put your account back in good standing without it being reported as “collections” which then lowers your credit score even more. You’ll do this catching up on your missed payments and paying any late fees. 

Every late payment will lower your score, so don’t wait until something goes to collections. Each day that passes after the due date, will hurt your credit.

How long do collections affect your credit score?

It typically takes multiple years for your score to recover. 

When you have open collections that have not been resolved, you are unable to improve your credit score. 

Some credit institutions are delayed in adopting the latest credit score models, so even if you have resolved an account which did go to collections, you might still face challenges with receiving additional credit. 

Do you have additional questions about debt and having healthy credit? eHome America offers a Money Management Course that answers questions relating to debt, credit, financial planning, creating and sticking to a budget, and planning for emergencies.