Original Creditor Vs. Collection Agency
When it comes to actually collecting on a debt, generally you’ll either be contacted by the original creditor or a collection agency.
When you’re contacted by a collection agency, it’s likely an older debt that the original creditor sold to the collection agency for pennies on the dollar.
If this is the case, it could actually be good news for you because it puts you in a good position to negotiate, but we’ll go more into that in a bit.
Once a debt turns into a collection and it’s logged on your credit report, you will see a significant drop in your credit score.
If you didn’t have any prior negative items on your credit report, this drop could be north of 100 points.
How much your credit score drops largely depends on how bad it was, to begin with.
In other words, a collection will have less of an impact on those who already have bad credit.
Another thing to keep in mind is that as the collection ages, it will have less of an impact on your credit score.
Paid Collection Vs. Unpaid Collection
One mistake I see people often make is thinking that paying a collection will automatically remove it from their credit report.
It’s important to keep in mind that the collection won’t be removed from your credit report even if it’s a paid collection.
Therefore, lenders will see the collection when they pull your credit report and it will likely affect their decision to lend you money.
At the very the least your interest rate will go up. With this said, it’s definitely worth removing a collection from your credit report.
Also, when you have a collection, it’s likely that there are late payment entries on your credit report associated with the same debt.
This is simply because you were probably late on your payments which is what caused it to go to collections.
These entries are usually (not always) separate from the collection, and late payments can also be removed from your credit report.
How Long Does a Collection Stay on Your Credit Report?
Whether a collection is paid or unpaid, it will remain on your credit report for 7 years.
This means that for seven years it’s going to affect your ability to get auto loans, credit cards, mortgages —basically everything.
The worst part about it is even if you do get a loan, you’re going to end up paying a higher interest rate because you have bad credit.
Of course, as a collection ages, it will have less of an impact on your ability to get credit.
How Are Medical Collections Different?
Until recently, medical collections were treated the same as all other collections.
However, FICO updated their scoring in 2014 to treat medical collections differently. Medical collections now carry less weight when your credit score is calculated.
Again, this doesn’t mean a medical collection won’t affect your ability to get a loan. Lenders don’t just look at your credit score to make their loan decisions.
They usually pull your entire credit report and notice your past negative items. This, in turn, will affect your approval as well as the interest rate.
This is especially true when you’re applying for a mortgage loan.
How I Remove Collections From My Credit Report
When I was in college I got a cellphone with Sprint. The phone service didn’t work well so I switched to Verizon but forgot that I owed Sprint a payment.
Long story short, it ended up going to Sprint collections and showing up on my credit report. I went ahead and paid the collection because I thought that would also remove it from my credit report.
1. Request a Goodwill Adjustment from the collection agency
The first step is to mail the collection agency a “goodwill letter”.
This is basically a letter that explains your situation, such as you want to purchase a house but can’t because of the collection on your credit report, and you’re kindly asking that they remove the collection out of goodwill.
I know this sounds like a long shot, but it works surprisingly well. The best way to write an effective goodwill letter is to use my sample goodwill letter template.