It is possible to have a 700 credit score when a default payment goes to collections. That being said, it’s not likely your credit score will stay at 700 once this happens. Credit scores tend to drop once there’s a report of collections.
If you have ever been on the receiving end of calls from a debt collector, you will know well the anxiety that comes with an account in collections. According to the Urban Institute, about 64 million Americans had a debt collection account as recently as August 2022.1
No one wants a credit account to be passed off to a debt collection agency, but it happens often to those experiencing financial difficulties that make it challenging to cover their monthly payments on time.
When a borrower defaults on a loan or stops making their credit card payments, lenders and credit card issuers will sell the debt to a third party collection agency, so they don’t have to deal with the hassle of getting payment. This is not only done for loans and credit card balances but also for landlords, utility companies, and medical service providers.
If you are looking to improve your credit score after a collection account, you may be wondering “can you have a 700 credit score with collections?” A good place to start is to gain a clearer understanding of the credit scoring system, and frequently check your credit reports. From there, you can better know how collection accounts impact your credit and what you can do to obtain a good credit score.
What Are Collection Accounts?
Collection accounts are accounts that are sent from creditors to collection agencies or companies. This occurs when a borrower defaults with the initial lender (usually when there is no payment or communication for a long period of time). The lender can choose to work with the agency or can sell the debt to the agency. Regardless, from here, the account is considered a collection account and you’ll have to work with that agency to get payment up to date.
Collection accounts will harm your credit scores with the major credit reporting agencies, including your FICO score and VantageScore. When it comes to your credit reports, these appear in the “collections” section of your report. Relevant information for the debts will also be provided, which can include the agency’s name, the type of debt, the balance owed, and the status.
The Impact of Collections Debt on Your Credit Score
As mentioned above, collection debt can significantly harm your credit scores, with effects that may be both severe and long-lasting. Even after being paid off, these accounts can remain on your credit reports for up to seven years. Their impact extends across multiple factors that influence your overall credit profile. Some of these factors include:
- Number of Collections — If you end up with multiple collection accounts within your credit history it can decrease your overall creditworthiness, even if you are able to improve your credit score. It’s definitely a section that creditors pay attention to. Also, multiple collection accounts will mean a significant drop, even larger than a single collection account. Overall multiple will be devastating for your score.
- Age of Collections — The newer the collection account/debt the more negatively it may look for creditors.
- Credit Mix — This is the different types of credit account on a credit report. Having collection accounts on your report even if you have several other kinds of accounts, a new collection account can harm your credit score.
- Payment History — Getting to collections will mean several missed payments on your debt. Because payment history is the most significant factor that impacts your credit scores, missing several can really harm your score.
- Credit Utilization — This measures the amount of debt you have vs. your available credit. A collection account will mean more debt and if this increases your credit utilization by over 35% or so, it can be harmful.
Is a 700 Credit Score Possible With Collection Accounts?
It is theoretically possible to get a 700 credit score (also known as a tier 3 credit score) with a collection account on your credit report. However, it is not common with traditional scoring models. A derogatory mark like a collection account on your credit report can make it incredibly difficult to obtain a good credit score like 700 or over.
How Long Do Collections Remain on Your Credit Report?
Collection accounts are almost always reported to the major credit bureaus and, according to the Fair Credit Reporting Act (FCRA), can remain on an individual’s credit report for up to seven years from the date of the original debt’s first delinquency.
Can Paying Off Collections Improve Your Score?
Newer credit scoring models do not include collection accounts that have a zero balance, meaning that when you pay off your balance, you should see your credit score increase. That being said, older models still factor in collection accounts even if they have been paid off—meaning they will show up on your credit report even after being paid off. Some lenders still use the older scoring models, especially mortgage loan lenders, so it is important to be aware either could be used.
How To Improve Improving Your Credit Score After Collections
If you have recently had a collection account on your credit report, there are plenty of things you can do to improve your credit score. A 700 credit score may not be too difficult to reach if you have paid off your collection account and you are using one of the newer credit scoring models. However, if you want to play a more active role in boosting your credit score, there are several strategies you can employ to get the results you want to see. These are some methods to repair your credit after collections:
- Pay your bills on time
- Don’t close your credit accounts
- Pay off your credit card balances
- Maintain a low credit utilization ratio
- Track your credit history and dispute inaccuracies on each redit report from the credit bureaus.
Here are a few of the most important things to keep in mind when rebuilding your credit after a collection account:
Prevent a New Collection Account
To ensure that your credit recovers quickly, do whatever you can to prevent any new collections from being created for debts you have. This will mean that you need to be very careful not to have any late payments in your payment history. Late payments have the potential to harm your credit, but not handling the required payments can also lead the lender or credit card issuer to sell the remaining balance to debt collectors. A secondary collection account will not only stall your efforts to improve your score but also lead to bad credit that is even harder to fix.
Handle all your minimum payments for your credit cards and monthly installments on your loans by the due date or earlier to make a positive impact on your credit. If you have a habit of forgetting to make your payments, we recommend setting up automatic payments so that you won’t ever miss a due date again. You will thank yourself for making the change when you see the difference in your credit score.
Lower Your Credit Utilization
One of the most reliable ways to give your credit score a major boost is to lower your credit utilization ratio. If you are approaching your credit limit on all your credit cards, you likely do not have much available credit and a very high utilization ratio. Paying down the balance of your credit cards until you have 70% of your total credit limit available will significantly improve your credit score.
By doing this, you will make your minimum payments more affordable and decrease the financial stress your credit card debt causes in your life. As a general rule for responsible credit usage, always keep your credit utilization rate at 30% or below. Additionally, you want a reasonable debt-to-income ratio to keep your finances as low-stress as possible.
Stop Applying for New Credit
After you’ve paid collections, take a break from applying for any new credit, including credit cards, personal loans, cash advance loans, or bad credit loans. All applications for new credit, whether that’s for credit cards or loans, will create a new hard inquiry on your report. Too many hard inquiries within a short period of time can result in bad credit, so it’s a good idea to take some time off so that your credit has time to recover.
It may take some time to see the results of your efforts, as credit scores don’t jump a hundred points overnight. Patience is crucial to building credit after a derogatory mark like collections. The time and effort you put into it are well worth it because of the financial opportunities that will be available to you with good credit.
Credit Scores When You Have a Collections Account: FAQ
Collection accounts can have a significant negative impact on your credit reports and credit score. This is because payment history is the most heavily weighted factor in calculating your credit score. Just one missed payment can affect your credit report for up to seven years. A collection account shows that you’ve had difficulty repaying your debts, which can lead to lower credit scores.
You can check your credit report for free once a year from each of the three major credit bureaus through AnnualCreditReport.com. This report will show you any collections along with other details about your credit history.
If you find incorrect information about collections on your credit report, you can dispute it with the credit bureau that provided the report. They are required by law to investigate your dispute. If the collection agency can’t verify the debt, it must be removed from your report.
Remember, maintaining a good credit score is an ongoing process. It’s important to regularly check your credit report, make payments on time, and keep your credit utilization low. If you have collections on your report, consider seeking advice from a credit counselor or financial advisor to help improve your credit health.
A Note From CreditNinja
If you’re currently going through a financial emergency, but don’t know how to get money when you already have a debt collection account, know you have some options available to you. Additionally, you should be aware of fair debt collection practices. Consider reorganizing your budget to free up some extra cash, asking a friend or family member for a small loan, or dipping into your savings account. But if a loan is ultimately the right choice for you, be sure to research all your options, like CreditNinja.
At CreditNinja, we pride ourselves in providing personal loans with an easy application, quick funding,* and a flexible repayment schedule. Fill out the online app in just a few minutes to find out how much cash you could get today!*
References:
Can Paying off Collections Raise Your Credit Score? | Experian
The Number of Americans with Debt in Collections Fell during the Pandemic to 64 Million | Urban Institute
Can You Have a 700 Credit Score With Collections? | Sensible Dollar
