Allowing a credit account to go into collections has a long-term effect on your credit score.
Collections can stay on your credit report for up to seven years. The same rule applies to missing payments on a personal loan. Each missed or late payment can damage your creditworthiness. Which of these is the higher priority? We’ll break that down for you in this article.
What are collection accounts?
Collection accounts are credit card or loan accounts that go to a collection agency after the account holder falls 90-180 days behind. This is typically the last step for the lender, and it significantly impacts the account holder’s credit score. A collection account will drop the score by several points and can remain on a credit report for up to seven years if no action is taken.
Late payments can be reported to one or all of the three credit bureaus, Experian, Equifax, or TransUnion.
How to prioritize your debt payments
Collection accounts and missed loan payments can both negatively affect your credit score. The best option is to keep any existing credit card or loan payments current. Getting out of debt is the only effective way to solve the problem. Here are a few ways to do it:
Debt snowball and debt avalanche
The debt snowball is a debt payoff method where you prioritize the account with the lowest outstanding balance first. Pay the minimum payment due on all other accounts and add some extra funds to the payment for your target account. Pay it off, then move to the next lowest balance. Debt avalanche works similarly, but it prioritizes the highest interest rate first while continuing to make payments on remaining debt.
Debt consolidation loans
Many Americans get buried in debt because they pay high interest on their credit cards. Simply making the minimum payment every month makes it almost impossible to pay the card off. A debt consolidation loan is a personal loan used to combine multiple high-interest debts into one monthly payment. Interest rates on these loans are typically lower than credit card interest rates, making the debt more manageable.
Wait for debt settlement offers
Collection agencies are generally authorized to offer a settlement amount to discharge your debt to them. That amount could go down as time passes and the collection agency deems the account “uncollectable.” Putting those collection accounts on hold could benefit you, but it’s important to do what’s best for your personal situation.
The Bottom Line
Making current debt payments on time should always be the priority over resolving collection accounts. Debt snowball, debt avalanche, and debt consolidation loans are helpful ways to help manage those payments. Debt settlement offers could help eliminate those collection accounts, but it’s best to wait until those offers come down. Creditors will accept less as time goes by.
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