Question: What impact do unpaid collection accounts have on my credit score?
Answer: The damage to your credit score occurs when the account goes into collections. However, ignoring unpaid collection accounts keeps the good credit actions that you’re taking from improving your credit score.
So, how should you handle unpaid collection accounts? Pay them off.
To find out what type of accounts are on your credit report and if there is anything you need to handle, you first need to check your credit report. Go to www.annualcreditreport.com and obtain a free copy of your credit report. Your credit report will list the current payments you are making to creditors — like your mortgage, car loan or utility bills — and it will also list accounts that have been charged off and sold to collection agencies.
The credit report will detail the contact information for the collection agency holding the account. Contact the collection agency and make arrangements to pay off the debt. Once the debt is paid in full, you should receive a letter or a receipt from the collection agency. Always retain the documentation that you paid the account. Oftentimes, the debt may resurface on your credit report from a different collection agency.
Typically, collection accounts remain on your credit report for seven years. However, in some instances the agency will remove the account once the debt is paid if you request they do so.
Cleaning up unpaid collection accounts on your credit report will then allow positive information to start to outweigh the negative.
The positive information that can impact your credit score is paying your bills and paying them on time. Making timely payments to your creditors accounts for 35 percent of your credit score. Not paying your bills on time each month will negatively affect your credit score.
Another factor that affects your score is the amount of debt you owe, so paying down debt will help improve your credit score. It’s also a good idea to keep open any paid-off accounts, so you have credit available to you.
Also, limiting the amount of new credit you apply for will also reflect positively on your credit report. Each time you apply for a credit card or loan, your credit score takes a slight hit. However, checking your credit report through www.annualcreditreport.com has no effect on your score.
Improving your credit score can take time, and the only way to know what you’re dealing with is to check your credit report and start tackling items one at a time. It will pay off financially in the long run.
Heather Murray is manager, regulatory compliance and education for Advantage Credit Counseling Service (dba Consumer Credit Counseling Service). For more information about the agency’s services, please visit www.advantageccs.org or to access the free online budgeting tool, go to www.onlinebudgetadvisor.com. If you have money or credit management questions, you can email Ms. Murray at firstname.lastname@example.org. Please provide your name, address and daytime telephone number with all inquiries. Ms. Murray tries to reply to all inquiries but, because of the volume of questions she receives, she cannot always respond.