How can I rebuild my credit after collections?

You can rebuild your credit score after collections by disputing the collection account if it’s an error or by paying off the balance. The latest credit scoring models ignore paid collection accounts, so your credit score should increase once the account shows as paid on your credit report. Even with older models, paying off the account can lower your total debt, which is good for your credit score. You will also need to manage credit responsibly going forward to really increase your score.

A collection account is unpaid debt that is turned over to an in-house collection department or a third-party collection agency. Lenders or creditors typically turn over your debt when you haven’t made a payment in 90 to 180 days. These collection accounts can stay on your credit report for up to seven years and can have a negative effect on your credit score. However, there are things you can do to fix your score after a collection account is placed on your credit report.

How to Rebuild Your Credit After Collections

Dispute Errors on Your Credit Report

If the collection account itself is an error, or certain details are listed inaccurately on your credit report, you must file a dispute with the major credit bureaus to correct the inaccurate information. Include any documents that prove the information is inaccurate in your claim. The credit bureaus typically respond to disputes within 30 to 45 days. Note that if the entry is accurate, it will remain on your credit report for 7 years, although the impact will lessen over time.

Pay Off the Debt in Collections

Paying off an account in collections can improve your credit, depending on the scoring model. Newer credit scoring models, like VantageScore 3.0 and 4.0 and FICO Score 9 and 10, ignore collection accounts with a $0 balance. Therefore, paying collection accounts may boost your score. However, scores generated by older models are not impacted by paid collections.

Ask for a Goodwill Deletion

If you want older credit scoring models to not factor paid collection accounts into your score, you can ask the creditor for a goodwill deletion to remove the entry from your report when you pay off the collection account. It’s unlikely they will delete the derogatory mark, since creditors are under no legal obligation to do so, but goodwill requests are successful in some cases.

Check Your Credit Report

Once you’ve taken action by filing a dispute or paying off the collection account, it’s important to confirm that your credit report updates properly. Creditors typically send updates to the credit bureaus once a month. You can check your credit report for free here on WalletHub and get daily updates.

Practice Good Financial Habits Going Forward

To rebuild your credit after collections, you need to add positive information to your credit reports on a regular basis. You can accomplish this by reporting rent and utility payments, as well as simply managing a credit card or loan account responsibly. That means paying your bills on time and keeping your credit card utilization low.

Payment history is the most significant factor impacting your credit. A record of consistently on-time payments will improve your credit over time. Even if you don’t have open credit accounts, you should pay your everyday bills on time to avoid them ending up in collections and impacting your credit score.

It’s best to keep your credit utilization ratio below 30%, but the lower you can get it, the better it is for your credit score. In addition, avoid having too many credit inquiries on your credit report, as submitting multiple applications for new credit can drop your credit score and signal to lenders you are desperate to borrow money. You can find more tips in WalletHub’s guide on how to rebuild credit.

How Collections Affect Your Credit Score

An account sent to collections could drop your credit score by 100 points or more. Collection accounts are factored into the payment history portion of your credit score, which accounts for up to 40% of your score depending on the credit scoring model used.

However, not all collection accounts are factored into your score. Below are a few things to keep in mind about how collections affect your credit.

• Paid collection accounts are not factored into the VantageScore 3.0 and 4.0 credit scores, as well as the FICO Score 9 and 10 credit scoring models.
• Paid medical debt and medical debt under $500 are not listed on your credit reports, so these types of debt can’t affect your credit score.
• Paid or unpaid medical collection accounts are not factored into your VantageScore 3.0 and 4.0 credit scores.
• Collection accounts under $100 to start are not factored into the FICO Score 8, 9, and 10 models.

If you think a collection account is affecting your credit score, you can check your credit score for free right here on WalletHub. You can also get a personalized credit analysis to see what exactly is impacting your credit score and how you can fix it.