Understanding the Impact of Collections on Your Credit and How to Improve It

When it comes to managing your credit, understanding the impact of collections and how to navigate them is crucial. At O1ne Mortgage, we believe in empowering our clients with the knowledge they need to make informed financial decisions. In this comprehensive guide, we’ll explore the effects of collections on your credit, how to address inaccuracies, and steps to improve your credit score. If you have any mortgage service needs, don’t hesitate to call us at 213-732-3074.

Do I Need to Notify the Credit Bureaus of Paid Collections?

One common question is whether you need to notify the credit bureaus once you’ve paid off a collection. The good news is that you don’t have to. The collection agency is responsible for updating the three major consumer credit bureaus—Experian, TransUnion, and Equifax. Typically, this update occurs within 30 days of your payment, changing the status of the collection account to “paid.”

However, it’s important to note that the collection account will remain on your credit report for seven years from the date you first missed a payment. While a paid collection has less negative impact on your credit score than an unpaid one, it doesn’t disappear immediately.

How Do Collections Affect Credit?

The impact of collections on your credit varies based on the type of debt and the credit scoring model used by lenders. For instance, the latest versions of the FICO® Score (FICO® Scores 9, 10, and 10 T) and the VantageScore® (versions 3.0 and 4.0) disregard all paid collections. This means that paying off your collections can significantly improve your credit score under these models.

Medical collections under $500 won’t appear on your credit report or impact your credit score, whether paid or unpaid. However, unpaid medical collections over $500 can negatively affect your score, though the impact is less severe in newer scoring models compared to non-medical debt.

Many lenders still use older credit scoring models, such as FICO® Score 8, which considers both paid and unpaid collections of $100 or more. Mortgage lenders often use FICO® Score 2, FICO® Score 4, or FICO® Score 5, which also take collections into account. Therefore, it’s beneficial to pay off non-medical collection accounts over $100 and medical collections over $500 to minimize their negative impact.

How Long Do Collections Stay on Your Credit Reports?

Collection accounts remain on your credit report for seven years from the date your debt to the original creditor first became delinquent. Typically, creditors report missed payments to the credit bureaus after one billing cycle (usually 30 days) without payment. If the creditor can’t collect the debt after 120 days, they may sell it to a collection agency, which will then report it to the credit bureaus.

If the collection agency can’t collect the debt, they may resell it to another agency, resulting in multiple collection accounts on your credit report. Fortunately, all collection accounts related to the same original debt will drop off your credit report seven years from the date the original debt became delinquent.

How to Remove Inaccurate Collections From Your Credit Report

If a collection account remains on your credit report as “unpaid” several months after you’ve paid it, you can take steps to remove the inaccurate information:

1. File a Dispute With the Credit Reporting Agency: You have the right to file a dispute with the relevant credit bureau. Provide any supporting evidence, such as a canceled check or bank statement showing payment. The Consumer Financial Protection Bureau offers guidance and templates for filing disputes.
2. Contact the Collection Agency: Dispute the incorrect information with the collection agency. If they agree there’s an error, they must send the correct information to the credit bureaus.
3. Contact the Original Creditor: If necessary, contact the creditor who sold your debt to the collection agency. If they determine the debt went to collections by mistake, they can help resolve the issue.

How to Improve Your Credit When You Have Collections

While accurate collection accounts can’t be removed from your credit reports until they expire in seven years, you can take steps to improve your credit in the meantime:

1. Dispute Inaccuracies: Obtain your credit reports from all three credit bureaus at AnnualCreditReport.com and dispute any inaccuracies.
2. Pay Your Bills on Time: Payment history is the most important factor in your credit scores. Set up automatic bill payments to avoid missing due dates.
3. Reduce Credit Card Balances: Aim to keep your credit utilization ratio below 30%, ideally under 10%.
4. Avoid Applying for New Credit: Each application creates a hard inquiry that can temporarily lower your credit score.
5. Don’t Close Unused Credit Cards: Keeping unused credit cards open can benefit your credit score by maintaining your available credit and lowering your credit utilization ratio.

The Bottom Line

Collection accounts can have a lasting impact on your credit, but there are steps you can take to minimize their effects. At O1ne Mortgage, we’re here to help you navigate these challenges and improve your credit score. For personalized mortgage services and expert advice, call us at 213-732-3074. Let us help you achieve your financial goals and secure the best mortgage options available.

By following these guidelines and staying proactive, you can improve your credit score and open up new financial opportunities. Remember, O1ne Mortgage is here to support you every step of the way.