The experts at Credit.com frequently receive questions from readers about how a debt that goes into collection affects their credit. After all, the path that an unpaid debt makes after it goes to collection can be long.
Here are some of the most common questions, and their answers, to provide collections-burdened consumers with some facts to combat some of the myths that abound when it comes to debt collection and credit scores.
1. Is a paid collection better for your score than an unpaid collection?
The answer is no, which could be surprising to some. However, resolving a collection provides other benefits, such as preventing the debt from being sold to another collections agency that could place another collection on your report, or lead to a lawsuit resulting in a judgment — both of which could drive your score down even further.
2. Are medical collections excluded from credit scores?
Not when it comes to FICO scores, the scores most widely used by the credit industry. Many experts, including Credit.com’s Director of Consumer Education Gerri Detweiler, and other advocates for the Medical Debt Responsibility Act argue that medical debt is different from other forms of debt, as it is often beyond the consumer’s control, can knock more than 100 points off of a credit score, and can remain on your credit report for seven years. The legislation would erase medical debts from credit reports within 45 days of being settled or paid. Supporters of the current practice, such as the Consumer Data Industry Association, which represents the national consumer reporting agencies — Equifax, Experian and TransUnion — express concern over the removal of “predictive” data, such as medical debt, from credit reports.
3. Are multiple collections on a credit report worse for your score than a single collection?
Not necessarily. The most important factors that affect how collections impact credit scores are those that look at how recently the collection occurred. As a result, you could, for example, be fortunate enough to get one of two collection debts removed from your credit report, yet see no score improvement if the remaining collection is the more recent of the two.
4. Does the amount of the collection debt matter?
Not at all, if the lender is using an older version of FICO — which is most likely, since the older models continue to be most widely used by lenders. Even if the newer versions are being used, the amount won’t matter if the debt is more than $100. The latest versions of FICO (FICO 8) that are increasingly being adopted by lenders, exclude collections of $100 or less. Nevertheless, whether being scored by the old or new FICO formula, consumers will see no scoring difference between collections (of the same vintage) having a $150 or $150,000 balance, nor will it matter if the debt is for a parking ticket or emergency medical procedure.
5. Will paying off a collection have the opposite effect and actually lower your score?
It is a commonly held belief — even taking on “urban myth” proportions at times — particularly among many in the mortgage industry, that when collections are paid scores go down. The claim is that when updated from “unpaid” to “paid,” the collection can appear to the scoring formula as having originated more recently than it did, which, if true, could lower the score. However, the “assigned” date on the credit report doesn’t change when the collection status is updated, nor do the credit scoring formulas give fewer points for a paid than an unpaid collection. So there is no evidence to support the myth that paying a collection can lower a score.
6. Will settling a collection impact my score?
No. Since, as we’ve learned, neither the dollar amount of a collection nor the paid vs. unpaid status has any bearing on the score, there’s no scoring impact from settling the debt. As in our first example above, the benefit of resolving the debt in this way lies with the prevention of further damage to your credit.
7. Will the removal of a collection raise my score?
It could, but there’s no guarantee. Because the length of time since the debt was assigned to a collection agency weighs so heavily on a credit score, the removal of the most recent collections can often be expected to raise a score. On the other hand, if there are multiple collections and it’s the older ones that you’re able to get removed, such as via a “pay for delete,” you may not see any improvement in your score following the removal of these older collections.
Collections can happen to anyone, whether you’re already managing your credit responsibly or have hit hard times financially. Separating the facts from the fallacies about collections and credit scores can help you make more of the right moves, and avoid some of the bad ones that can have an undesirable result. One way to check on the impact a collection might be having on your credit is to obtain your free Credit Report Card from Credit.com or pull a free annual credit report you’re entitled to by law.