Understanding how long collections stay on your credit report is an important way to begin the process of rebuilding your credit. It’s never ideal to be stuck in collections. You want to avoid it at all costs.
A collection notification on your credit report is severely damaging. It can result in your inability to get other credit. That includes a mortgage or car loan. The best way to avoid collections is to budget appropriately and live within your means.
However, if you do unfortunately get stuck in collections, understanding that your report will reflect that action for seven years can help you retool your financial future.
What is collections anyway?
Collections is simply the action of attempting to collect a debt. You’ve borrowed money from a lender, either for the cash itself or for an item like a vehicle. You are expected to repay it.
When you do not pay on it for a certain period of time, the lender can initiate a collection action. That means they can forcibly attempt to get the money from you. This force comes in a variety of different forms, from phone calls to repossession.
The original credit sometimes has its own collections department. More commonly however, the original lender will sell your debt to a company that specializes in collections.
The original lender will only get pennies on the dollar. That is because of the difficulty the collector may have getting the money from you.
So how long will it be on my report?
A collection action will remain on your credit report for seven years from the initial date of the action itself. That means if you enter collections for a loan on January 1st of 2018, that collections action will appear on your report until 2025! Your credit score will also take a fairly substantial hit.
Companies generally treat all debts the same. That is the case whether they are medical, home or other types of loans.
The credit bureaus have recently augmented how they handle medical debts in their credit scores. That means your score will not drop as much as would another type of debt.
This is because both lenders and credit bureaus understand that, whether consumers can pay back the money or not, they are highly likely to take on medical debt. However, the collection action will still remain on the credit report.
So what do I do?
The best thing to do is work with your lender before you enter collections. The lender will lose money if they have to sell your debt to a collections agency.
Their interest is in having you repay the full amount of the loan. As such, they are very likely to work with you in the form of reduced payments, a longer term or other measures.
If you do find yourself in collections, speak with the collection agency that owns your debt. Ensure you understand what you owe and when.
If there is any error, ask for a debt validation letter. This means that the collections agency must produce proof that they own the debt and that the debt is, in fact yours.
Next, make the payments. The faster you take care of the collection action, the better off you are.
Finally, ask if the collections agency can petition to have the action removed from your credit report. They might be able to do that after you complete repayment. (But before the seven year period expires.) This doesn’t always happen, but it’s worth asking.