Often, creditors will choose to use debt collectors to attempt to collect outstanding debts. These debts will often be sold directly to the debt collectors or the debt collectors will be hired on commission, with compensation coming in the form of a percentage of the amount of money they successfully collect. As with the original holders of the debt, these debt collectors will typically report the status of the debt to credit reporting agencies.
Credit Reporting
Credit reporting agencies, which compile information in a person's credit report---the dossier of information that forms the basis of a person's credit score---that is collected from both public records and from information provided by creditors. When a loan is issued, credit reporting agencies will generally be notified. As the debt is paid off or becomes delinquent, credit reporting agencies will be notified of this, too.
Credit Reports
When a debt is given to a collector, it will be recorded on the debtor's credit report as being "in collection." This designation means that the creditor believes that the debtor is not meeting the requirements of the loan contract and is seeking the collection of the debt through the use of a collection agency. This designation will lower a person's credit score, as it indicates the loan is currently in default and may not be paid off.
Debt Collectors
As debt collectors seek collection of the money that debtors owe, they will generally continue to report the status of the debt to credit reporting agencies. For example, if the debt collector collects half of the money owed or the individual settles with the debt collector agency, then the collector will request an update of the person's credit report. Sometimes, debt collectors will use a change to the person's credit report as a factor in negotiations over payment of the debt.
Considerations
Sometimes, debtors will seek to have a debt collect report the status of a debt in such a way that minimal harm is done to the debtor's credit score. For example, instead of reporting a debt as "settled," the debt collector may report the debt as "paid as agreed," which will boost the debtor's score higher. Sometimes, debtors may agree to pay back a debt in return for the debt collector reporting the debt in a particular way to credit reporting agencies.
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