Being in debt can be quite mentally tasking. It occupies your time, finances, and keeps you from having a good credit score. When you receive that dreaded call from debt collection agencies, it can be quite a harrowing experience. Using a collection account is one way to rid yourself of debt and build your credit score again.
Your credit score is important because it is an indicator of your financial health and financial institutions will review this score before having any financial dealings with you. Here is how you can’t use collection accounts to repair your credit score.
What Is A Collection Account?
A collection account is the section of your credit report that shows any previously defaulted financial obligations. When financial agencies review your credit report, the collection account Will enable them to determine the state of your debt situation. These debts could be sold to a debt purchaser or debt collection agencies by the original creditor. The main target of debt collectors is to retrieve money owed to the creditor it represents and some of these agencies have set percentages of the debt they must recover from the debtor.
Collection accounts could legally remain on your credit report for up to seven years from the initial date of your debt default. This practice is supported by the FCRA (Fair Credit Reporting Act) and it can put quite a dent in the confidence of future lenders because of the records of your previously missed payments and unpaid debts.
Will Collection Account Payments Improve Your Credit Score?
If your collection account has an empty balance then you are in luck. Modern credit scoring models disregard collection accounts with a zero balance. Most new credit rating/scoring models will bypass a collection account without a balance and utilize other aspects of your credit history to give you a suitable credit rating. Therefore if you pay all the outstanding debts in your collection account before reviewing your credit score you are bound to get a decent rating if other aspects of your credit history are solid.
As you settle the debts in your collection accounts, your payments reflect and it is deducted from the amount owed. With each payment, newer credit scoring models will recalculate your credit score and give you a better rating. This is why debt settlement remains the most reliable way to resolve the debts that you owe. It is the easiest and fastest way to build up and repair your credit score, and it will improve your chances of getting lines of credit from other financial institutions.
It is also important to note that some lenders still utilize legacy credit scoring models therefore payment of debt in your collection accounts may not positively affect your credit score. This practice is common with mortgage lenders and this therefore makes it quite important that you check to see how paying your debts will affect your credit score when older models are used for evaluation.
It is important that you remain constantly aware of the yardstick your credit score will be measured against. Debt settlement remains the best way to settle the debt in your collection account but you should also ensure that you are aware of the scoring models used by financial institutions. If you are unsure, you could contact a financial professional for guidance on how to navigate your debt settlement process and improve your credit rating.
How Does A Collection Account Affect Your Credit Score?
Collection accounts are recorded under payment history. When your credit score is being calculated, payment history is the biggest determinant for what the final score will be, which is why it is quite important that you pay attention to it. If you have an active balance on you collection account, you will generally have lower scores than other individuals without any collection accounts. This is why these accounts are quite important to your overall score and heavily influence its outcome.
Another way collection accounts affect your finances is that it can influence lender decisions towards you. Some mortgage lenders have policies that require you to pay off all outstanding debt on your collection account before you can secure a mortgage loan. Fannie Mae is a prime example of this practice and there are other major lenders who do the same. This therefore means that if you do not settle the debts in your collection accounts it may be difficult to get new lines of credit and your credit score will be impacted.
It is always best to settle all outstanding debts in your collection accounts because the longer it sits there the more damage it does to your credit score. Debt collectors will update your collection account with each debt settlement therefore it remains your most reliable way out of debt.
Can Paid Collections Be Removed From Your Credit Report?
The law requires collections to be reported for up to seven years although credit reporting agencies and debt collectors are under no requirements to remove these collections. This is why extra attention must be paid to ensure that your debt settlements work towards removing the collection account from your credit history. You reserve the right to dispute any inconsistencies in your credit report with the credit bureau.
When you initiate disputes, you can argue your case and ensure that the collection account is removed from your credit report. This doesn’t apply for only collection accounts and you can also challenge any other inconsistencies you may notice in your credit report. Building your credit score after being in debt can be tasking but it is important to your financial health. As you make payments, check your report to ensure those payments have reflected and when payments are complete, check that the account is removed from your report.
After Account Settlement What Next?
Once you have cleared all outstanding payments on your collection account, congratulations you are now free! You can begin building your credit score back up. To do this, you must avoid taking all theaters that led you into debt prior. You should ensure that you do not request for lines of credit that you do not need. Requesting for credit leads to a hard inquiry which will temporarily lower your credit rating. Only request for credit you absolutely need as this would help you manage your credit score better.
You should also ensure that you pay all your bills on time and avoid any late payments. If your bills are never overdue, there won’t be any reason for debt collectors to get involved and you can therefore keep your credit report spotless. You should also keep your credit card debt to a minimum by using credit cards for only emergency purchases you cannot cover at the time. Using credit cards indiscriminately could easily balloon into a mountain of debt. With these few easy steps you can have a blissful post debt life.
Debt settlement remains the most effective way to rid yourself of collection accounts. You could patronize the services of a financial advisor who would help you plan your finances to meet frequent payments that would enable you to clear all the debt in your collection account.
Sources – Become Debt Free