Financial Advice

Dealing with Credit Score Fallout

Dealing with Credit Score Fallout

Many people struggle with debt collection at some point in their lives. Whatever caused this financial situation, knowing your credit score is suffering can be devastating. What can you do when your debts go to collections or a charge-off appears on your credit report?

How Debt Collection Impacts Your Credit Score

Debt collection actions can appear on your credit report. They indicate that you have failed to pay your debt as you promised, and as such, they are a negative impact. These accounts get labeled for what they are – collections. That is a warning to other lenders that you failed to make payments.

At the same time, collections actions on your credit report will negatively impact your credit score. That’s going to create a ripple effect for some time. However, you can do a few things now to help improve the situation.

Maintaining a Good Credit Score During the Debt Collection Process

When a collections account appears on your credit report, don’t just ignore it. Take whatever action you can to remove it or manage it. Here are some steps.

  • Verify if the debt is accurate. Do you owe this money? If it is a new collection account, verify the original creditor and, when possible, pay the debt.
  • If you can afford to pay off the debt, contact the collection agency directly and offer to settle the debt. They may be willing to remove the debt from your credit report if you make payment in full. Get this in writing.
  • Keep up with your other debt payments. Ensure you’re paying your other loans on time every month, which will help you rebuild your credit over time.

If you agree with the debt collection agency about paying back that debt, honor it. Ask the agency to report the debt as paid on time on your credit report. The key here is to make sure you’re doing what it takes to pay off this debt if it is one you owe. Any debt settlement could reduce your credit score, but maintaining that debt over the long term without payment will hurt, too.

Handling Debt Collection Disputes

You may believe the debt is inaccurate or wrong. You may not want to pay it back. One step you can take is to dispute it. You can dispute the account with the credit bureau reporting the collection actions. When you do (you can do this right on their website), it forces the debt collection company to obtain proof that you owe the money. If they cannot find and present that proof or do not take action promptly, the credit bureau must remove that collection account from your credit score.

Disputes don’t always mean the account will disappear, especially if it is a verifiable debt. However, this could be one of the most effective ways to protect your credit from unreasonable claims.

Rebuilding Your Credit Score After Debt Collection

You’ve settled the debt. The debt has gone to collection and perhaps even charged off. You want it behind you, but how can you get new credit when you already have such a mark on your credit report like this?

You can put numerous steps and strategies in place to rebuild your credit.

  • Start by using credit limitedly. If you still have open credit cards, use those accounts but pay them off monthly. If you already carry a balance on them month-to-month, don’t use them any longer and work to pay them off.
  • If you don’t have existing credit, start with a secured credit card that reports to the credit bureaus. Rebuilding may mean starting over, but over the long term, this will help you push the “bad” on your credit report off the picture over time.
  • Make sure you’re making your utility payments on time. If you have a mortgage or car loan, pay those on time. Set up automatic payments, so you’re never late here.
  • Monitor your credit report over time. If you find errors there, be sure to report them and dispute them.
  • Give it time. Over time, you’ll see your score improve with consistency.

Seeking Professional Help

There are many situations where you can benefit from working with a debt collection specialist or a credit counselor who can help you learn your options. Get ideas into the vast number of options available to you and then work consistently at paying down your debt and making better financial decisions. It takes time, but there’s specific help out there.