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When you miss payments on your loan, credit card or other bill, your account can be sent to a collection agency and create a negative entry on your credit report that can hurt your credit score. Unpaid debt—funds you've borrowed and failed to repay—typically are sold to collection agencies around six months after your first missed payment.
The types of debt that can go to collections include:
- Credit card balances
- Student loans
- Auto loans (even after a vehicle has been repossessed, if its value is less than the remaining balance on the loan).
- Personal loans
- Medical bills
- Utility bills
- Bank fees and overdrafts
- Fines and fees imposed by courts, law enforcement or government agencies.
What Happens When an Account Goes to Collections?
When you fall behind on payments, your creditor may put your account into collections. Some creditors have in-house collection departments, but many will charge off the debt, close your account and sell the debt to a third-party collection agency. This typically happens when your payment is around 120 days late, but it can take up to six billing cycles for a credit card to be charged off. When your account goes into collections, the balance on your charged-off account changes to $0, and a new collection account appears on your credit report.
Collections on your loan or credit card accounts rarely come as a surprise. Your late and missed payments will appear on your credit report, and you'll typically receive late notices and requests for payment from your creditors—letting you know that your account needs attention.
Collection accounts on bills from medical providers, utilities and other services can come as more of a surprise, since late payments on these kinds of accounts typically don't appear on your credit report.
How Long Do Collections Stay on Your Credit Report?
Collection accounts stay on your credit report for seven years, starting from your first missed payment. Collection accounts are considered negative entries on your credit report, and since information from your credit reports is used to calculate your credit scores, any collection accounts that appear can have a negative impact on your credit scores. Not only that, lenders reviewing your credit report may see them as red flags.
Collection Accounts That May Not Affect Your Credit Scores
Whatever their original source, collections can have long-term consequences to your credit. However, there are a few instances when collection accounts can have less impact—or even no impact—on your credit score.
More than 100 million Americans have medical bills they struggle to pay, according to a Kaiser Family Foundation Health News investigation. Changes to the way medical debts in collection are reported may give consumers a bit of breathing room as they work toward paying off their debts.
All three national credit reporting agencies (Experian, TransUnion and Equifax) have changed their reporting policies related to medical debt. The following debts in collection will no longer appear on consumer credit reports:
- Medical collections with an initial reported balance of less than $500
- Medical collection debts that have been paid
- Unpaid medical collection debts that are less than one year old.
Additionally, the latest credit scoring models—FICO 9 and VantageScore® 3.0 and 4.0—give less weight to unpaid medical collections than to other collection accounts. While some medical collections can still impact your credit, the Consumer Financial Protection Bureau estimates that roughly half of people with medical debt on their credit reports will have it removed from their credit history thanks to recent changes in reporting.
Traditionally, collection accounts have stayed on your credit report for seven years, even if you paid off your debt. FICO and VantageScore have altered their calculation methods so that paid collection accounts no longer figure into your credit scores for FICO® Score☉ 9 and FICO® Score 10, as well as VantageScore 3.0 and 4.0.
FICO® Score versions launched since FICO® Score 8 was introduced in 2009 ignore collection accounts under $100, also known as "nuisance" accounts.
How to Avoid Having Accounts Go to Collections
Clearly, the best way to avoid having collection accounts create problems with your credit is to avoid having accounts go into collections in the first place. But that may be easier said than done, especially if you're going through difficult financial times. Depending on your individual circumstances, one of these strategies may help.
Set Reminders for On-time Payments
Paying every bill before its due date is the surest way to avoid collections—and one of the most important things you can do to build and maintain good credit. If you're having a hard time keeping track of multiple bills and due dates, consider setting up automatic payments or automatic reminders on your phone.
Reach Out to Creditors
If you're having difficulty covering a bill, try contacting your creditor to see if you can work out a payment plan. They may be willing to allow you to skip a payment or two, accept smaller payments or reduce your interest rate, if you agree to resume making payments and work toward paying off your debt. Here, it's key to reach out: Skipping payments or sending in partial amounts may not keep you on track if you haven't worked out an arrangement with your creditor first.
Consider Credit Counseling
A nonprofit credit counseling agency may help you regain your footing if you're struggling to pay your bills month after month. An accredited credit counselor can help you make a budget, work out a plan to get caught up on bills and negotiate with creditors on your behalf to create a formal repayment plan. They can also explain your options if repaying your debts isn't affordable.
Nonprofit credit counselors are not to be confused with for-profit credit "repair" services. You can find a reputable nonprofit credit counselor through the National Foundation for Credit Counseling.
The Bottom Line
Because collection accounts can have real consequences to your credit, it's a good idea to check your credit reports regularly. If you believe a collection account is listed inaccurately on your credit reports, or has been on your report for more than seven years since the date of the first missed payment, you have the right to dispute the entry. Also keep an eye out for medical debt that should not be reported—or that should be removed based on recent changes discussed above.
If you find a collection account on your credit report, paying it off could eliminate its impact on credit scores calculated using the latest versions of the FICO® Score and VantageScore systems. The impact of an unpaid collection account will decrease over time, and it will eventually drop off your credit reports.