Does a Collection on My Credit Report Automatically Get Me Denied?

Lenders have various reasons for turning down credit applications. The Fair Isaac Corporation, which produces FICO credit scores, explains that high debt load, late payments, long-term delinquencies that lead to charged-off accounts, repossession and bankruptcies all play a role. Collection accounts are among the harmful items that can lead to denial when combined with other factors.

Definition

A collection is an unpaid account turned over to a collection agency by the original creditor. For example, a bank might charge off seriously delinquent credit card accounts and sell them to debt collectors at a discount. The collectors make a profit if they are able to coerce more money from the debtors than they paid for the accounts. Liz Pulliam Weston, a MSN Money website columnist, explains that delinquencies are usually charged off within six months.

Time Frame

Unpaid accounts show up on credit reports and stay there for seven years from the date of the first late payment. Privacy Rights Clearinghouse, a consumer privacy protection website, explains that collection agencies can add their own entries, resulting in two negative items. They must use the same date as the original creditors, not the date they took over the debts, so the collection accounts are erased at the same time.

Effects

Credit reports with collection accounts do not automatically cause denial of credit or loan applications. They do make it harder to open new accounts because they show a consumer did not fulfill repayment obligations. This could cause a rejected application or a loan offer with subprime terms like high interest and fees.

Considerations

Collection accounts have an effect as long as they show up on credit reports, but they lose some of their power if everything else on the credit report is in good standing. They also have less impact as they age. Creditors focus most on recent activity, so building up a year or two of prompt payments and maintaining small account balances offsets collection accounts from several years ago.

Solution

Collections can sometimes be removed from credit reports by paying them off. They must be erased completely or payment does not help the credit rating. Paid collection accounts still look bad, and the bad report from the original creditor also remains. The Debt Steps financial website recommends negotiating removal of the collector entry and a change in status to "paid as agreed" from the original account holder as part of any payment agreement.

Alternative

Collectors may not be able to properly validate some accounts. This gives consumers the ability to have them erased from credit reports. The Federal Trade Commission explains that any item containing a mistake can be disputed with the Experian, TransUnion and Equifax credit bureaus. Check collection items carefully as they might have a wrong date, balance or other small bit of data that makes them disputable. File a challenge through each credit bureau's website. They must clear the collections entries from their files if they cannot verify the information within 30 days.