Does Debt Collection Affect Credit?

The question “Does debt collection affect credit?” is one many borrowers face when confronted with overdue debt. In practice, when a loan is transferred to collection, it is recorded on the credit report and may significantly harm the credit score. This article analyzes how debt collection influences credit and outlines practical legal solutions.

1. What Does Debt Collection Mean on a Credit Report?

To understand does debt collection affect credit, one must first grasp what “debt collection” signifies in the credit context. 

According to Circular 15/2023/TT-NHNN dated December 5, 2023, which governs credit information activities of the State Bank of Vietnam (“Circular 15”), credit information activities are defined as the collection, exchange, processing, storage, and protection of credit data, the creation of credit information products, and the provision of credit information services by the State Bank. Among these, the credit report is a type of credit information product generated by the CIC based on data collected in accordance with legal provisions.

At the same time, negative information about a borrower refers to credit data on non-performing loans, breaches of payment obligations, and other adverse records that affect the assessment of the borrower’s repayment capacity. This includes information on bankruptcy, administrative violations, and legally effective court judgments or decisions against the borrower.

From these definitions, it is clear that debt collection on a credit report represents the stage at which a loan is deemed unlikely to be repaid, compelling the financial institution to classify the debt and initiate recovery measures.

Within Vietnam’s credit information system, the National Credit Information Center (CIC) records detailed information on loan status, including both unpaid debts and those under collection. Unpaid debts are those for which the borrower has fallen behind but remain directly managed by the bank, which continues to pursue repayment. In contrast, debts transferred to collection are typically classified as bad debts, subject to more stringent recovery measures. 

Credit institutions are required to report regularly on the debt status of their clients. This data becomes an integral part of an individual’s credit history, forming the basis of their credit score. Banks and financial institutions rely on this information to assess a borrower’s reliability and repayment capacity when reviewing future loan applications.

2. Does Debt Collection Affect Credit Score?

Does debt collection affect credit? The answer lies in examining how collection accounts influence credit scoring models. In Vietnam’s credit system, scores are calculated using data from the CIC, including payment history, credit utilization, length of credit relationships, and overdue accounts. Debt collection has a significant negative effect on credit scores because it signals a borrower’s inability to meet financial obligations. This directly reduces access to new credit, whether for investment loans, mortgages, real estate financing, or even opening a credit card. 

In the long term, while the impact of debt collection gradually diminishes, the record remains stored in the CIC system for years. When assessing new credit applications, lenders view a history of debt collection as a key risk factor, influencing both loan approval decisions and applicable interest rates.

In Vietnam, under Article 10 of Circular 11/2021/TT-NHNN, the CIC also records non-performing loans classified as Group 3, 4, or 5, corresponding to substandard debts, doubtful debts, and debts at risk of capital loss. These categories severely damage credit ratings and significantly affect future borrowing capacity at banks and financial companies.

3. How Long Does a Debt Collection Stay on a Credit Report?

Does debt collection affect credit score also depends on how long the record remains on file. Pursuant to Clause 1 Article 13 and Clause 9 Article 3 of Circular 15/2023/TT-NHNN, negative debt history can be retained for up to five years from the date the borrower fully completes repayment.

Even after full repayment, the collection record may appear until the retention period expires, unless successfully disputed or corrected.

4. Factors That Influence the Impact of Debt Collection on Credit

Does debt collection affect credit depends on several different factors:

• Size of the debt: The larger the debt, the greater the negative impact on credit. A substantial collection account signals higher financial risk to lenders.
• Repayment status: Whether the debt has been paid in full, partially settled, or remains unpaid will determine how it is reflected on the credit report and how lenders evaluate future loan applications.
• Time elapsed: The impact of a collection account diminishes over time. An old debt collection record carries less weight than a recently reported one.

5. Does Paying Off a Debt Collection Improve Credit?

Does debt collection affect credit also depends on whether the borrower fully settles the outstanding debt. Paying off a collection account in full can significantly improve a credit score, although it does not completely erase the history of debt collection. The difference between full repayment and partial settlement lies in how future lenders assess repayment ability, which in turn affects credit limits and applicable interest rates.

By way of international reference, under FICO Score 9 and 10, paid or settled collection accounts are excluded from scoring calculations, which can substantially enhance a borrower’s credit profile. In Vietnam, repayment information is updated in the CIC system once the debt has been fully cleared.

After repayment, the timeline for credit recovery depends on several factors, especially the borrower’s ability to maintain a positive payment history with other loans. Time plays the most critical role; borrowers must remain patient and strictly fulfill financial obligations for several years to rebuild trust and accelerate the restoration of their credit score.

6. Can Debt Collection Be Removed from Credit Reports?

A debt collection record may be deleted under specific circumstances:

• Data errors: If a borrower’s credit report contains inaccurate information (for example, a debt already settled but still marked unpaid, incorrect outstanding amounts, or duplicate records), the borrower has the right to request corrections from the CIC or the reporting financial institution. Such requests must be submitted electronically or in writing, stating the reasons and supported with evidence proving the error.
• Expired retention period: In Vietnam, CIC retains negative debt information for a maximum of five years from the date the borrower fully repays the loan. After this period, the record is automatically deleted. In some international credit systems, the retention period may extend up to seven years.
• Settlement with creditors: In certain cases, borrowers may negotiate with creditors to restructure the debt, such as extending repayment terms or reducing interest rates.
• Additionally, borrowers can file a formal dispute with the CIC to request corrections, attaching documentation that demonstrates inaccuracies or inconsistencies in the reported credit information. If accepted, the erroneous data may be rectified or removed, leading to potential improvements in the borrower’s credit score.

7. How to Protect Your Credit from Debt Collection Impact

The negative impact of debt collection on credit can be prevented by adopting proactive measures, including:

• Ensure debts are paid on schedule to avoid being reclassified into delinquent or collection accounts.
• Work directly with banks or finance companies before debts are transferred to collection status, bad debt, or overdue categories.
• Utilize debt management services or legal advisors to help restructure obligations, negotiate with creditors, and provide expert guidance on improving financial stability.

8. Debt Collection and Credit in Vietnam: What You Should Know

Debt collection and credit reporting in Vietnam are governed by several key legal frameworks:

• Civil Code 2015: Establishes obligations in contract performance, liability for damages in case of breach, and measures to secure obligations. 
• Law on Credit Institutions 2017: Regulates lending activities, debt classification, bad debt resolution, and the rights and responsibilities of both lenders and borrowers.
• Circular 15: Governs credit information activities, including collection, exchange, processing, storage, protection, and provision of credit data, with CIC serving as the central authority.
• Circular 31/2024/TT-NHNN on June 30, 2024: Provides regulations on the classification of banking assets (debts) for commercial banks, non-bank credit institutions, and foreign bank branches arising from banking operations.

In Vietnam, overdue debts with banks or finance companies are reported to the CIC, where they are recorded as part of an individual’s credit history. The CIC tracks all such data, from standard overdue debts to those transferred to collection. This underscores the importance of maintaining a healthy credit record, as financial institutions rely heavily on CIC data when making lending decisions. Accordingly, understanding whether and how debt collection affects credit is a prerequisite for clients to safeguard their future access to financial resources.

So, does debt collection affect credit? The answer is a resounding yes, debt collection has a severe negative impact on both credit scores and personal credit history. However, borrowers can minimize these effects and rebuild creditworthiness by paying debts on time, negotiating with creditors, and strictly complying with financial obligations. TNTP, with its team of professional lawyers, is always ready to provide consultation and effective legal support in handling debt collection and credit-related issues.