It can be very upsetting to see a late payment on your credit report, especially if it’s gone to a collection agency. Usually, to get to that point, your bill is truly delinquent — like 120 days or more overdue.
But even if it hasn’t gone that far yet, a late payment notice on your credit report is never a good thing. Your payment history makes up 35% of your FICO score, so a late payment — especially a collection account — will have a negative impact on your score.
How to minimize the effect of unpaid bills on your credit score
If you’re in a situation where your account is in collections, don’t panic. There are a few simple things you can do to minimize the damage to your credit score.
Review your annual credit reports
First, you can get your free annual credit reports from each of the major bureaus every 12 months. Review the negative information on each report. Confirm the accuracy of the line item, including the delinquent date. This is important because the item will stay on your report for seven years starting on the reported date of delinquency.
If it isn’t accurate or the seven-year time frame has passed, then you can dispute the line item. The FTC has instructions — including a sample letter — on how to dispute a mistake on your credit report.
Pay off the debt
If the data on your report is accurate (and the debt has been validated), it’s time for the next step, which involves paying the debt. But you should know that paying the bill won’t instantly improve your credit.
This is because, as mentioned above, it will remain on your credit report for seven years. I know that’s disappointing to hear, but paying it off could keep you from being sued for nonpayment. That’s a good reason to wipe out the debt.
Talk to the collection agency and work out a deal to pay off the bill. You can request that the company report the bill as paid. That doesn’t raise your score, but it makes you look like a responsible person for clearing up a debt.
Can you make a “pay for removal” deal?
There are some misconceptions out there when it comes to getting negative items on credit reports removed. Consumers often ask for removal of the item in exchange for payment.
Usually, this doesn’t work because the collection companies have contracts with the credit bureaus that prohibits this activity. If you think about it, it makes sense. If everyone was able to get the negative items removed, then credit reports wouldn’t reflect an accurate credit history.
But there is an exception you should know about: If the bill ended up in collections due to a legitimate dispute, then you might be able to get it removed if you pay the bill.
Can a credit repair company fix my score?
There are companies that say they can “clean up” your report — for a fee, of course. You now know how to approach this legally on your own, and for free. But folks are drawn to these credit repair companies by the promise of having collection accounts removed.
First of all, if anyone guarantees they can get the item removed, run for the hills. I’m serious. There are many scammers in this field.
Credit repair is not a business that can claim success on every case. Their approach is often to throw spaghetti against a wall and see what sticks. Sometimes they succeed, sometimes they don’t.
For instance, one of the strategies is to dispute everything, even if it’s accurate. You might get lucky if the original lender doesn’t respond to the bureau’s investigation. At this point, the bureau has to remove the negative line item.
But really, if you owe the money and the details are accurate, the honorable thing to do is to pay the bill. And as already noted, you can ask that your account show that it was paid in full.
How long will it impact your score?
After two years, a late payment or a collection account will have less of an impact on your credit score. For each year that passes, your score will improve. This is true as long as you are paying all of your bills on time and keeping a low credit utilization ratio, which is the amount of debt you have compared to the amount of credit you have available. An optimal credit rate utilization is below 30%.
Insider tip: If you want to raise your score as quickly as possible, keep your credit utilization ratio below 10%. Be patient and pay all of your bills promptly and you’ll see your credit score rebound over time.