Credit Card Sent to Collection - How to Rebuild Credit Afterward

Reader Question: "I have recently graduated from college and had a baby in the same nine months! I have hit financial struggles and have not been able to pay any of my credit cards. My credit cards will soon be sent to a collection agency. I have full intentions of getting these debts paid off once I get a full time job. I will also start paying my student loans. Is there any hope of fixing my credit score after my accounts are sent to collections and paid off from there? Will my student loan payments help build my credit score back up?"

First of all, congratulations on your graduation, and your new baby! Secondly, I'm sorry to hear about your financial struggles. Now let's get on to the question at hand...

Yes, it's certainly possible to rebuild your credit after the initial hit. Your score will go down when the late / missing payments are reported to the credit-reporting agencies. There's no way for me to predict how much it will drop -- only that it will. Other factors are taken into account by the credit scoring models, but late payments are high on the list. Your payment history accounts for about 35% of your FICO credit score. So when the original creditor reports it, your score will take a hit.

The best thing you can do after that is to (A) pay off the past-due balances as soon as possible, and (B) make all payments on time going forward. When you eventually pay off those accounts, I would wait 30 days and then check your credit reports again. You want to make sure your reports show the payment in full. You won't be able to remove the collection entry from your reports -- that kind of entry can stay on there for up to seven years. But you can change the current status to "paid" and get on with your life. Your score will rise steadily over time, as long as you continue to pay all other bills on time.

Making your student loan payments on time will certainly help you rebuild your score after the collection issue. Think of it as a "time and good behavior" situation. Regardless of what damage you do to a score, you can always improve it with time and good behavior. Within this context, I'm referring to the kind of behavior where you pay all bills on time, maintain low balances on credit scores, etc.

Here are some related articles you might want to check out:

• How to increase your credit score quickly
• Paying off debts and collections to improve credit

I hope this helps you out some. Good luck with the new baby.