The Impact of Debt Collection on Your Credit Score

When you fail to pay your debts, your debt can be sent to a collection agency. Here’s what happens and how it impacts your credit score.

Debt to Collections 

If you are more than 30 days late on a payment:

• Your lender will reach out to you and seek payment.
  • It’s best to try to resolve past due payments before they are sent to collections.
• Your lender may also try to work with you on repayment.
• If you miss payments for several months in a row, your lender can sell your debt to a collection agency.

Why Collection Agencies are Motivated

The collection agency will earn a big commission if they get a payment from you, so they are super motivated to do whatever they can to collect. Here’s how it typically works:

• Paid on Collection. Many collection agencies earn a percentage of the money they recover, so if they don’t collect, they don’t get paid.
• Discounted Debt. Some agencies buy debt from lenders for far less than the original balance. Even partial payment can be profitable for them.
• Time. The older a debt becomes, the harder it is to collect. Agencies are motivated to act quickly while the account is still likely to be paid.
• Settlements are a Win. Agencies may be willing to accept less than the full amount owed because recovering something is better than nothing.
• Performance-Based. Individual collectors and agencies are often evaluated on their recovery rates, which encourages consistent outreach and negotiation.

What This Means for You

Collection agencies are motivated to recover payment, which is beneficial to you in a few ways:

• You may have room to negotiate a settlement.
• You can ask about payment plans or reduced balances.
• You have the right to confirm the debt before paying.

Knowing how collections work can help you approach the situation more confidently and make informed decisions that protect your credit and financial well-being.

Agency Will Contact You

There are few people more motivated than debt collectors. They will try to contact you relentlessly. If you can settle, the calls will stop, but the impact can be long-lasting.

If you get a collections call or it appears on your credit report, here are the steps to take:

1. Review Your Credit Report. Check all three bureaus (Equifax, Experian, and TransUnion) to confirm the collection is accurate and belongs to you.
2. Dispute Errors. If the collection is incorrect, duplicated, or outdated, you have the right to file a dispute with the credit bureau reporting it.
3. Get the Details. Ask for details about the debt and explore payment or settlement options if you find that the collection is yours and is valid.
4. Settle Strategically. Paying or settling a collection won’t erase the credit damage, but it can prevent further harm and may help with lenders that require paid collections.
5. Focus on Positive Habits. Make all current payments on time, keep credit card balances low, and avoid new missed payments to offset the negative impact over time.
6. Monitor Progress. Track changes to your credit report and score to ensure collections are updated correctly.

How Your Credit Score is Impacted

Your credit score will take a hit if you can’t pay down your debt. Even just one missed payment can reduce your score significantly. If your debt is sent to collections, your score may drop even more.

Why Collections Hurt Your Score

Collections can impact your credit in a few key ways:

• Type and Balance. Medical collections, paid collections, and small balances may be treated differently depending on the credit scoring model, but unpaid collections generally have the greatest impact. 
• Lower Score. Collection accounts are considered serious negative marks and can significantly reduce your score, especially if the collection is recent.
• Payment History. Payment history is the largest factor in your score, and collections signal missed payments.

Lasting Impact

Collections can remain on your credit report for up to seven years from the date of the first missed payment—even if the account is later paid. The good news is their influence fades over time—especially when you take action, resolve the debt, and build strong positive credit habits moving forward.

Do One Thing: Try to form a plan to make even the smallest debt payments so that your problem doesn’t get out of hand.