Your credit history can help you or hurt you -- depending on your current and past financial behavior. Credit reports and scores help lenders determine whether or not to do business with you while simultaneously determining the interest rates you should pay on new loans and credit accounts. The credit scoring formulas take all of your credit information into account when awarding you a credit score. Thus, a collection agency can influence your credit rating by inserting a collection account on your credit report.
Collection Accounts
Collection accounts arise when you fail to make payments to an unsecured creditor. Because the creditor is unsecured, it cannot seize your assets when you stop making payments on your debt. Unsecured creditors, such as hospitals, credit card companies and small businesses, often turn to collection agencies for help recovering delinquent debts.
Collection agencies submit your account information to the credit bureaus. The debt you owe subsequently shows up within your credit records as a collection account. Collection accounts lower your credit score because they signify that you do not always pay your debts on time and thus present a higher risk to future creditors.
Credit Damage
The degree to which your credit score will drop after a collection agency reports derogatory information on your credit record varies. In general, consumers with high credit scores suffer a greater degree of credit damage from derogatory information.
One exception to the rule occurs when your credit report contains a collection account for a debt below $100. The FICO '08 scoring formula, which was released in early 2009, does not take these small collection accounts into consideration when determining your scores.
Time Frame
Collection accounts impact your credit for the full amount of time they appear on your report. The older the account is, however, the less derogatory impact it has on your scores. Recently added credit information carries greater weight than old debts and accounts.
Collection accounts only impact your credit for seven years. After the seven-year reporting period passes, the Fair Credit Reporting Act requires all credit bureaus to delete the derogatory trade lines from your credit report. The reporting period begins when your payment to the original creditor is 180 days late -- not when the collection agency originally reported the bad debt to the credit bureaus.
Additional Damage
Collection agencies do not only negatively impact credit by inserting collection accounts. If a debt collection company sues you, the credit bureaus insert a record of the resulting court judgment in your credit file under "Public Records." Like collection accounts, public records are derogatory. Unlike collection accounts, a judgment appears on your credit report for the amount of time your state grants the collection agency to enforce the judgment. This can result in credit damage from your original unpaid debt impacting your credit score for ten years -- sometimes more.
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