Collection accounts, get informed.
The notorious collection accounts, which are major derogatory items, can appear on your credit report and can damage it. Like other negative information, collection accounts can significantly damage your credit score for a long time. They can stay there for seven years.
To give you a little more insight, a collection account is a debt account that has been sold by the original creditor to a third-party debt collection agency. You may be wondering why this happens, well.
It happens because when you stop making payments for a certain amount of time, long enough for the lender to think you won’t finish. Usually 180 days is enough time for the lender to collect on the loan and the account will be considered forfeited.
Once the account has been charged off, the original creditor closes its account and often transfers or sells it to a debt collection agency or debt buyer.
Debt buyers generally focus on buying debt accounts and hire debt collection companies to attempt to collect the debt.
No matter who the debt was transferred to or when it was transferred, the Fair Credit Reporting Act (FCRA) allows credit bureaus to legally report collections up to seven years after the date of first delinquency, also known as (DOFD) by date of first delinquency.
According to Experian, which is one of the credit bureaus. The date of original delinquency is the first reported delinquency. That is, if you have a 30-day delinquency reported and never catch up on payments, then the delinquency would later be reported as a 60-day delinquency and, only later, as a 90-day delinquency.
Collection agencies begin reporting to the credit bureaus as soon as they acquire your account. By reporting negative information about your account to the credit bureaus, debt collectors try to encourage you to pay the debt.
Generally, debt collectors report to the credit bureaus each month, like most other types of business lines on your credit report. Therefore, if you have a collection account, you will most likely go to the collection agency reporting your account to the credit bureaus once a month.
One very important thing to keep in mind is that if you already have an account in collections, meaning that the original creditor has already closed your account and transferred it to another owner, you do not owe the lender from whom the loan originally originated. The debt now belongs to someone else, so it would not make sense to pay the original creditor. This would be money lost.
Having one collection account on your credit report already means low points, now imagine having two. This means a direct path to a bad and low credit history. Collection accounts on your credit history speaks to the fact that you couldn’t and wouldn’t be able to make good on a loan. So having them on your credit report reflects significantly negative information on your credit report.
Collections are considered significant derogatory items, so they can lead to a sharp decline in your credit score. However, collections with low balances that may not affect your score at all, depending on the credit scoring model being used to calculate your score, such as VantageScore or a FICO credit score.
FICO 8 and 9 scores ignore paid and unpaid collections that had an original balance of less than $100.
FICO 9, VantageScore 3.0 and VantageScore 4.0 do not count paid collection accounts against you and treat medical collections as less important than other types of collection accounts.
Keep in mind that paying collection accounts in an effort to improve your credit score will not do so. If you are looking to improve your credit score and rebuild it, you should opt for other options; such as buying Authorized User Tradelines, for example.