It has been a recent concern for Americans to handle their increasing debt and the implications that come with it. With every passing year debt is becoming a more pressing issue for the average American, rising to about $11.67 trillion approximately per household across the U.S. according to the Federal Reserve Bank of New York, with the average American holding about $96,371 in debt. With this, a pressing question arises, does this debt entail debt collection for each of these debt holders and does debt collection affect credit score? The short answer is, yes it does. Having even one account in collections or a debt collection process means that your average credit score is in trouble. A credit score is a numerical representation of your creditworthiness based on your credit history and any part of that which is being pursued by a collection agency will affect your credit score.
How Can Debt Collection Affect Credit Score
There are various ways that debt collection and being in the process of debt collection affect one’s credit score. And that is more pressing when we consider the complications of commercial debt collection, where you need to recover your accounts with a lower propensity to pay. Let us explore the different ways that a collection process affects credit scores and the implications of that issue.
The payment history indicates the patterns of payment that a consumer has around the purchases that they make on credit. In paying back the amounts that are owed, some people would not be as initiative-taking as they should be and that will lead them into debt, sometimes quite quickly with a little oversight. The first thing that is impacted is your negative payment history. When a debt is sent to collections, that is an indication that payments have not been made on time and you have defaulted on a loan or credit account. Collection agencies will report this negative payment history to credit bureaus, creating an issue around your credit scores.
Secondly, having any sort of accounts in collections for unpaid bills or receipts will have an impact on the credit score as well as failing to clear accounts in collections is often viewed unfavorably by lenders and can lower the credit score. It is an indication that you have had trouble paying your debts and that means that the chances of repayment are lower for you, hence having a direct impact on your credit score.
Thirdly, if you have a debt in collections that was a revolving credit account such as a credit card, chances are its balance may have contributed to your credit utilization ratio, which is the amount of credit that you use compared to the total credit limit on your card. This kind of high credit utilization ratio can also hurt your credit score. This would mean that any debt collection can affect credit scores for a high credit utilization ratio, and many consumers end up in collection and influence credit scores because of this issue.
The Common Debt Collections That Affect Credit Score
As we have established multiple kinds of debt collection processes have an impact on your collection. One of the top collection efforts that involve these consumers is medical debt. Since various patients across the U.S. have medical debt, a study has estimated that 20 million adults, nearly 1 in 12 people struggle with medical debt. Everyone has some form of medical debt they need to handle because of the cost of medical services in the U.S. which has stretched the estimate of medical debt to at least $220 billion. This means that medical debt collections affect credit scores and the people who are unable to pay them and often default on their medical bills.
But how does medical debt collection affect credit score? When patients acquire their healthcare services, they are often doing so on credit like everything else, and that means that they are often left with mounds of debt after a costly procedure, and sometimes an unassuming trip to the E.R. and that is where their accounts end up in medical debt collections. In a recent ruling, New York has passed legislation prohibiting the inclusion of medical debt on consumer reports, which means that medical debt is one less thing that people need to worry about when it comes to credit scores. But everywhere else where medical debt is still reported on consumer reports, a credit report will reflect medical debt and that is how medical debt collection affects credit scores.
While there are some mounting debts like credit cards, auto loans, and mortgages that crush the average American as well, medical debt collections affect credit scores because of the amount of medical debt that ends up in collections, despite some groundbreaking legislation and steps forward in mitigating this issue for people who have medical debt.
Will Pay Off Collection Debt Help Credit Score?
But is there something that can be done about this growing problem? Most people wonder does paying off collection debt improves your credit score. And it can. One of the reasons that debt collection is daunting for the average person is that most collection agencies do not have proper systems in place that facilitate installments or transitional debt payments. With most people being unable to pay off their debt in entirety, many of them remain in collections for extended periods. But smarter and more cordial debt collection agencies now have systems through which they can offer smart debt repayment and flexible payment terms for their customers so they can wean off the debt that they owe.
Paying off debt on time can have a positive impact on your credit score. If you can make timely payments, it demonstrates responsible financial behavior and can positively impact your payment history, which is a contributing factor to your credit score. It is also a positive implication for your credit utilization ratio as being able to pay off credit card balances can decrease your credit utilization ratio and have a positive impact on your credit score.
If you are wondering if paying off debt will impact your credit score, there is a big possibility that paying off debt can also increase your credit score, because you will be paying timely installments on your credit which will maintain your credit score, and eventually raise it to reflect a good payment pattern and behavior. In addition to this, having a good credit mix can also raise your credit score, which means if you have different kinds of debt like mortgage or auto loans, paying off the debt for these loans can raise your credit mix and project you as a good borrower that diligently pays off debt when it accumulates.
Educating Borrowers About Debt Collection
While we have discussed how credit scores can be affected by debt collections and how they can be improved as well, there is a core problem that needs to be addressed as well. Why do so many people end up with bad debt in the first place? It’s because there is an essential lack of financial education that leads to people accumulating debt and that answers why educating debtors should be a priority for collection agencies.
Financial education must become part of lending practices so that everyone who borrows money for any type of loan also knows how to manage that loan and repay it properly. Most of the time, borrowers do not have adequate information about proper repayment strategies and financial management and find themselves in a position where debt collection affects their credit score. To avoid that, collection agencies, credit lenders, unions, and financial institutions should prioritize responsible borrowing practices and provide financial education to their borrowers to ultimately help them deal with fewer accounts receivable issues.
If you find your borrowers regularly defaulting, they are not making smart financial decisions and if you invest the time into educating them, it helps them manage their debt better and avoid long-term delinquency.
So, there you have it, these are some of the ways that debt collections impact credit scores and a single implementation of financial education that can help borrowers make better decisions and take control of their debt repayment processes.
Finding a Reliable Dent Collection Agency
It might seem unrelated but the kind of collection agency that handles your collections can also affect your credit score. If a collection agency does not use empathetic, and tactful techniques to recover debt, the borrowers find themselves intimidated and unable to get a handle on their debt repayment processes.
Collection agencies have come under fire every year for aggressive tactics toward their borrowers, which has led to general dislike and distrust towards collection agencies. Various factors make an ideal debt collection agency, and some of the most common factors are understanding the customer’s intent to pay and streamlining their payment processes, providing flexible payment terms, and handling individual customers’ payment history and patterns to devise payment plans for better debt recovery.
Cedar Financial understands that managing debt is a strenuous process that requires proper planning and customer education. We ensure that we advise clients to not only carry out progressive lending practices but also conduct financial education for their clients. On our end when we carry out collections on behalf of our clients, we ensure that customers are put at ease, and they are dealt with empathy and understanding so each account is responsibly managed and debt recovery becomes an easy process for everyone involved.
