If you find yourself faced with debt collection, one of the first things that you will think about is your credit score. There’s a lot of information out there about the importance of your credit score – especially when it comes to securing a mortgage, loan, credit card or any other type of financing – but there’s still confusion over how debt collection changes things. To put it simply, debt collection is likely to have a negative impact on your credit score, but this isn’t something that lasts forever and there are things that you can do to help.
How Does Debt Collection Impact Your Credit Score?
When you miss payments on a loan, credit card or any other form of credit, your creditor will report these missed payments to credit reference agencies. Experian, Equifax and TransUnion are the three main credit reference agencies in the UK and, though they all calculate credit scores slightly differently, they all take personal debt collection into account. If you are unable to catch up with the missed payments, your creditor could issue a default notice and start the debt collection process by handing things over to a debt collection agency.
In some cases, if the debt remains unpaid after being transferred to a debt collection agency, legal action may be taken against you. If a court orders you to repay the debt and you fail to do so, you could receive a County Court Judgment (CCJ). A CCJ is recorded on your credit report and it will have a severe negative impact on your credit score.
There’s a lot that goes into calculating a credit score, so it’s hard to give an exact figure of how many points your score will drop by when you’re faced with debt collection. Things such as how recently the debt defaulted is taken into account, as is the amount owed and how many other debts you have.
Does Debt Collection Impact Your Credit Score Forever?
Though debt collection does have a negative impact on your credit score, it’s not something that lasts forever. A default or CCJ is recorded on your credit file and remains there for six years. Whilst there, your credit score will drop and you’ll find it harder to get credit. But, after six years, the default or CCJ disappears, and your credit score will slowly start to recover.
You can reduce the negative impact of debt collection on your credit score by settling the debt or agreeing a payment plan with the debt collection agency. Though this won’t instantly increase your credit score, it will reduce the amount owed and bring the debt collection process to an end. It also shows lenders that you are taking control of your debts and making an effort to pay the money back.
You can find out more about debt collection by getting in touch with our helpful team.
