Collections & the Impact on Credit Scores

Using a credit card is a simple way to pay for an item. Taking out a loan may be your only option when buying a car, house or any large purchase. The interest rate can be steep and affect you financially. However, your credit score also may be negatively impacted if you fail to make your payment on time and your debt is sent to collections.

Collections Definition

When you default on a debt payment, your creditor transfers your account to a collection agency that either works in the same company or is hired to collect debt on its behalf. Third-party collection agencies receive a percentage of the amount that they are able to recover from a debtor. Sometimes creditors sell very old debt to a collection agency, which, in turn, keeps all that it collects. The representative assigned to your account may call you frequently and repeatedly to request that you pay your debt.

Credit Score Definition

Your credit report is a history of your credit activity. The major credit reporting bureaus, Experian, TransUnion and Equifax, assign your history a credit, or FICO, score based on your level of proven responsibility in taking on and paying your debts. Lenders, insurance companies and some employers use your credit score to determine your risk factors.

Impact of Collections

Credit scores may range between 300 and 850. With a higher score when applying for a loan, you may receive the lowest interest rate. Your payment history is 35 percent of your credit score, so, once you are delinquent with your payments, your rating decreases. When a bill is sent to collections, your score drops even more. According to CNNMoney, if you carry a credit score above 700, it can drop 100 points or more if you are 30 days late with a payment. Sometimes a collection agency will negotiate with you to settle the debt for less than you owe. If your credit rating is low, this will not affect your score as much as it would if your rating is high.

Removing Negative Entries

You can improve your credit score after you have had a debt that was sent to collections. First you need to see the impact on your credit history. You can order one free credit report annually from each of the three major bureaus. You can pay a fee to receive your credit score at the same time, since it is not included on the free reports. Once you have reviewed your history, check it for accuracy. If there is a negative entry, such as collection activity, that is more than seven years old (some bankruptcies may stay on a report for 10 years), request that the credit bureaus remove it. They will determine the facts and respond within 30 days. If they refuse to remove the item, ask the original creditor to do so. Once all old entries and inaccuracies are removed from your history, you should see an increase in your credit score.