Does debt collection affect your credit score?

Does debt collection affect your credit score?

Does debt collection affect your credit score?

Before we answer that question, it’s first important to understand what is a credit score. Basically, it is a parameter banks or loan companies utilizes to assess the "credit-worthiness" and their "risks of debt recovery" when disbursing a loan to you. In the case of banks, it's usually tabulated based on a ratio of your credit card balance versus limit.

So what can impact your credit score?

Obviously, over the years, the bills and loans that you have accumulated and failed to pay over a prolonged period of time can affect your score. If you have delinquent debts ( debts not paid in time ), be it a car, mortgage or renovation loan, credit card bills, or even a medical debt or student loan, it can attribute towards your credit score.

It doesn’t really matter if your debt-to-income ratio is low. As long as you have a high card balance in relation to your card limit, and you’re not paying them off promptly, your score will hurt. Individuals who maxed out their limits will suffer a less than desirable credit score.

The important thing to note here is that the information of your payment history and how you have managed your loans or bills over time will be reflected. So it literally pays to keep track of your credit history and score and keep them in the best possible shape.

When the creditor write off your unpaid loans as bad debt, they may sell it to a collections agencies. This usually happens after a lapse of 180 days of non-payment. When a debt is sold to collection agencies, these collection agencies may further report the debt to the credit bureau as an “accounts in collection”. Chances are, you may not even be informed that your outstanding debt has been sold off to a collection agency.

Your payment history is a critical factor. And if your credit report indicates that you have paid bills late or left it unpaid, or had an account referred to collection, or declared bankruptcy, it is likely to affect your score negatively. Over time, the collection account will affect your credit score more if your debt remains unpaid. If you happened to have accumulated several new and old collection accounts over time, paying off the ones that's most recent will make more sense.

It is important to note that once you are entered into record with the bureaus, regular and prompt payments for things like rent or utility bills does not earn you any reduction of credit score. Typically, even making timely payments towards your collection account does not earn your any brownie points or improve your credit score.

So why is it important to maintain a good credit score?

It may seem trivial to you to have long outstanding debts in arrears. But when it comes to obtaining credit cards, buying a new home or servicing a new car loan, your credit score can vastly impact your eligibility. It can determine the interest rate your pay or even whether you do qualify for that housing loan with attractive interest rates.

As a general guide, consumers who utilizes no more than 20% of their allowable credits receive a higher credit score than those who utilizes more than 20% of their credit limits. You can be sure that when applying for credit, your lenders will be checking out your credit scores. Safely speaking, about 30% of your credit scores is dependent on how much credit you’re currently utilizing. And about 15% is determined by the length of your credit history.

You can obtain your credit report by visiting Credit Bureau Singapore. All it cost is a measly $6.42 inclusive of GST to download a copy of your report.

What can you do to improve your credit score?

· If you have long existing debts, consider paying them off.

· If this is not an option, consider communicating with your debtors to work out an instalment plan.

· You can also approach a credit counselling agency to help you with managing your debts.

· Stop being a habitual late paymaster.

In conclusion, once your debts enter into a collections account and is registered with the bureau, it does affect your credit score and your ability to take future loans. To maintain an excellent credit score so that you will not face challenges taking up a loan in future, it’s important that you make an effort to pay all your bills and loans on time. Keeping your credit card balances low and repaying them promptly is a sure-fire way to keep a good credit score.

If you're a creditor facing delinquent debtors, find out how we can be your breath of fresh air with just a call. DC Guru offers you debt collection on steroids