Q:  What happens to credit score if account goes to collections?  There are so many factors to consider.  Would you be kind enough as to give me some pointers as what to look for or avoid?  Please point me in the right direction.  I really appreciate your help.  Larry   

A:  Dear Larry,

It sounds like you are in the same boat as many people today:  concerned about the effects of your financial situation on your credit score.

In your case, you have an account that may be going into collection. The quick answer is that, if you do go into collection, it will show up on your credit report and affect your credit score. As with almost all negative information, it will show on your credit report for seven years.

Odds are, if you are already headed into collection, your credit report shows that you have a past-due bill. That will stay on your credit report for seven years as well, but paying it off will lessen the damage. A delinquent payment will be viewed more kindly by lenders than an uncollected balance.

It is important to know that an account that goes to collections does not always end up on your credit report.  The US Fair Debt Collection Practices Act sets out a procedure that collection agencies must go through to validate your debt.  This procedure gives you at least 30 days from the date you are notified to keep a collection off your report by clearing up any errors or making the payment, if you can.  

If you are not able to clear up that bill, your credit report will display the problem and your credit score may be affected.  How much it affects your credit score depends on who is crunching the numbers. Your credit report is just a log of your financial activity. Credit scores are created by computer programs that process the numbers from your credit report, weighting them according to factors that matter most to the lender. That’s why a car dealer may tell you your credit score is one number and a mortgage broker may give you a different number.

The lender’s goal is always to determine the likelihood you will pay back a loan. Their opinion will govern whether you get the loan and the interest rate it will carry if you do. So your credit score does matter. 

Your credit report may also be checked by potential employers, insurance and cell phone companies, utility providers or even landlords.

Because consumers have so much at stake, this area is heavily regulated by the U.S. government.  The Fair Credit Reporting Act was set up to protect consumers and, along with other legislation that followed, is designed to promote accurate reporting and protect consumer privacy. 

So what do you do about your bad debt? You have two choices, depending on the circumstances:

• If you truly owe the money, pay it. Either now, to beat the collection effort, or as soon as you can. Make sure you check your credit report after the bill is paid. You want to make sure the reporting agency is showing it as paid.
• If you do not owe the money, if it was billed in error, file a dispute with the three credit reporting agencies: Experian, TransUnion and Equifax. You dispute an item by writing to the agencies with an explanation of the problem. You should send along any documents that support your claim. They have to investigate within 30 days and give you the results. 
•  

If you know you have a ding on your credit and expect an employer or lender to check your credit report and run a score, be proactive.

Your best bet is to be honest. No matter what happened – whether you lost your job or got in over your head or whatever – call and explain.  If there is a balance outstanding, explain what you are doing to pay it off.  If the information is not correct, explain that and describe what you are doing to dispute it. You may not get a pass, but you may have a better chance than you would have otherwise.

Sorry to say, only the passage of time will remove items on your report that are negative, but accurate. 

It’s a good idea to check your credit report at least annually.  By law, you are entitled to a free copy of your credit report each year. You can request the report at annualcreditreport.com. 

While your credit score is important, you should not let it or your concern about it rule your financial life.  If you can’t pay a bill now, you can’t.  Breathe deep.  Look for positive ways to improve your financial situation. Increase your income or cut your expenses to generate cash to help pay off that debt.  And when you can pay it off, do it. 

Then, give the creditor time to update the records and check your credit report.  If it doesn’t show the debt’s been paid, write the credit agency and include your proof of payment so they can update the record. 

You’ll feel a lot better and the other people viewing your credit report will see you have taken some important steps to fix and improve your credit.