Does a Debt Collection Agency Affect Credit Reports?

Having collection accounts on your credit reports has a long-term effect on your credit rating, even if you eventually pay off the accounts. Collection agencies have the same rights that creditors and lenders do when it comes to reporting the status of consumer accounts that creditors and lenders turn over to them.

Process

Collection agencies buy overdue debts from creditors, lenders, medical providers and others in an attempt to profit from collecting all or a portion of what consumers owe on those debts. New collection accounts usually appear on consumers' credit reports after agencies buy their past-due debts. Agencies have the right to report to the credit bureaus all new activity associated with collection accounts because they purchased those debts. The information debt collectors provide to bureaus remains on credit reports for seven years. Agencies also may sell unpaid accounts to other collectors.

Credit Reporting

Information from the original creditor and all debt collection agencies associated with a debt appears on a consumer's credit reports, even if collection accounts sold to another company are inactive. However, credit bureaus must remove all accounts associated with one delinquent debt from a credit report at the same time after seven years, according to the Experian credit reporting company. The timing for the seven-year period begins from the first delinquency date reported to credit bureaus.

Debt Balance

A collection company can't arbitrarily raise the amount of a delinquent debt by reporting to credit bureaus that you owe more than you do. For example, collectors can't try to collect interest and fees in addition to the original amount you owe in certain circumstances, according to the U.S. Federal Trade Commission. However, there are exceptions, because some state laws and consumer financial agreements allow collectors to attach additional charges to delinquent debts.

Settlements

You may choose to pay a past-due debt in full, or a debt collection agency may allow you to settle an account by paying less than you owe. In either case, the negative information from the collection process will remain on your credit report for seven years. A collection agency may not be helping you by agreeing to less for less than the original debt, because a "paid in full" notation won't appear on your credit report. Experian notes that a settled account shows you never met the obligations of a financial agreement, which makes a settlement less favorable for your credit history than a paid-off account.