How debt collection affects your credit score—and steps you can take

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There are things you can do to improve your credit after debt collection.

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If you’re facing debt collection, then you may be concerned about how unpaid debts can affect your credit score. Debt collection is usually detrimental, but the good news is that the negative effects don’t last forever. You have options—both during and after the debt collection process—to ensure that your credit score bounces back.

Your credit score is important because it affects your ability to borrow money, find housing, and even get a job. But navigating the intricacies of credit scores while you’re involved with debt collectors can be stressful.

Ease your mind and learn what to expect from debt collection and its effect on your credit score.

First, let’s explore how debt collection is recorded on your credit report, which provides the data that determines your credit score. Your credit report contains comprehensive information about your credit history, including all pertinent information about paid and unpaid debts.

If the debt collection process is just beginning, the account associated with the debt—such as your credit card or student loan—may be marked on your credit report as “charged off” or “in collections.” This doesn’t usually happen until the account is officially in default.

The original creditor’s name remains associated with the debt unless and until the creditor chooses to sell it, usually at a discount, to a debt collection agency. If that happens—and it often does—the account with the original creditor is marked as “closed” and a new entry for the debt collection agency appears on your credit report. All of the relevant information about the debt is carried over to the new entry.

As the debt collection process continues, the delinquent account may be transferred to multiple debt collection agencies. And if you have multiple unpaid debts, those are reported separately on your credit report. These factors can easily make your credit report become lengthy.

The good news is that settling or paying off overdue debts is also documented on your credit report. But your credit history—good and bad—remains visible on your credit report for at least seven years.

Every credit score provider uses a different algorithm to calculate credit scores. They evaluate information such as payment history, credit utilization, the length of your credit history, types of credit accounts, and recent credit inquiries. FICO and VantageScore are two major providers of credit score algorithms.

Your payment history, which includes any history of debt collection, has a significant impact on your credit score. For example, payment history accounts for approximately 35% of FICO-calcuated credit scores. The negative impact of debt collection depends on several factors, including:

You can reduce the negative impact of debt collection on your credit score by paying or otherwise settling a debt with a creditor or collection agency. Ending the debt collection process doesn’t erase the collection history—you’ll need to wait seven more years for that to occur—but credit scoring models may view paid collection accounts more favorably.

Another factor worth considering is that not all debt is treated equally. For example, some credit scoring models are less punitive toward medical debt, recognizing the often unpredictable nature of medical expenses.

If debt collection has sunk your credit score, then you may be wondering about how to repair it. Anyone can improve their credit score by taking the right actions, but be prepared to be patient, as you’re not likely to get a credit boost overnight. Repairing your credit score after debt collection is a marathon, not a sprint.

Here’s how you can work on raising your credit score:

Even if you’re still in the debt collection process, you can try to negotiate a “pay-for-delete” agreement with a creditor or debt collector. This will remove a debt collection account from your credit history immediately after the debt is repaid.

Debt collection affects your credit score because it influences your payment history, which—as detailed on your credit report—provides extensive information about your creditworthiness to potential lenders, landlords, and employers.

You may be panicking as your credit score sinks, but remember that there are steps you can take to recover and improve your score.