Collections Impact on Your Credit Score
Myth Busting Credit and Debt
Myth: Collection accounts are the worst thing on your credit.
Reality: Bankruptcy and foreclosures hurt much worse. Collection accounts make up for about a 5-10% drop in a credit score while foreclosures account for about a 25% drop and bankruptcy between 30-35%.
What can I do?
If preserving your credit rating is your priority you may want to work on creating a plan that will allow you to avoid filing for bankruptcy or having a house foreclosed upon. This may mean that certain debts that you owe may have to take a backseat for a moment while you focus on creating a repayment plan that you can manage.
For example, if you have medical bills, credit card debt or other collection type accounts, you can first begin by contacting who you owe and see if there are arrangements that can be made that will help buy you some time to fortify your repayment plan. It’s also possible you may receive some concessions such as temporarily reduced payment terms or deferred payments.
Keep in mind any deferred payments are typically added to the end of a loan and will need to be paid back. This may end up costing you a bit more in interest but it may be worth your consideration if it provides you the necessary immediate relief needed to work out your new repayment plan.
You can also call a credit counselor, such as the ones available at Debt Reduction Services. They can help you assess your situation by reviewing your household budget including income and expenses and debts owed and devise a repayment program based on your needs.
Regularly reviewing your household budget by performing self-analysis can be a great way to minimize issues before they arise. Using a program such as Microsoft Excel and entering your income and expenses (payments out along with cost of living items such as food, transportation and more) will help you identify areas in which you can potentially save money and apply it towards your debt. You can also create money savings goals, even if it is a small percent of your income, in order to keep yourself in the habit of routine savings.
These steps can help you ultimately build a stronger household budget and should a financial hardship occur you will be better prepared to manage it.
In summary, collection accounts, while many times associated with persistent collection practices aren’t the worst thing to go against your credit profile. If your finances are already shaky you will need to determine what collection arrangements can be made against you before determining whether to pay or not as often times a judgment or garnishment derived from a collection account can severely derail your ability to pay your obligations.
For more information or to set up your free credit counseling session with one of our Certified Credit Counselors give us a call at 1-877-688-3328 or submit your information through our website and receive the help you need with your collection debt.
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