How Collections Affect Your Credit Score and Credit Report

How Collections Affect Your Credit Score

Last Updated: February 16, 2012

Your credit score is an important number. It is how a lender or creditor quickly decides whether or not you are creditworthy. Most credit scores range from 300 to 900 points and the higher your credit score, the better. To make the most out of your credit, you need to be aware of the factors that go into calculating your credit score and what factors take the biggest toll on your scrore. Charge-offs and collections lead the pack in being two of worst possible items you can have on your credit file.

Collections - How Did Your Account Get There?

We all know the current economy is not that great. Money is tight and you are finding it hard to keep within your budgeted monthly expenses. This may mean trimming back on some expenses to meet some other financial obligations. One thing leads to another and before you know it, you are 4-6 months behind on that credit card payment. Chances are that credit card company has been trying to call you but you're not answering the phone. You need to face the music - you are over your head in debt.

By now, the credit card company has pretty much given up on you. They have "charged-off" your account (i.e. written if off their books) and they have now turned your account over to a collection agency. Debts can be either assigned or sold to collectors and collection accounts change hands every six months or so. So, how will this collection affect your FICO score and can you recover from this ding on your credit report? Let's look at what goes into a credit score and then see how we can help you dig yourself out of this mess.

Payment History

As you probably know, late payments will negatively affect your credit score. A 30-day late payment can lower your score anywhere from 60 to 110 points. Just image what an account in collections will do!

According to MyFico.com, your payment history makes up 35% of your credit score. This is the largest category percentage-wise and it contains these factors:

Types of Accounts
Presence of Adverse Public Records - i.e. bankruptcy, judgements, law suits, liens, and collections
Severity of Deliquency (how long past due)
Amount Past Due on Delinquent Accounts or Collections
Recency of Delinquent Accounts or Collections
Number of Past Due Items on File
Number of Accounts "Paid as Agreed"

Charge-Offs, Collections and Your Credit Score

When a creditor thinks you are not going to pay at all on your credit card bill, they charge-off your account. A charge-off is one of the worst entries that can appear on your credit report and it will remain on your credit report for seven years from the date it first went deliquent. An unpaid charge-off will affect your credit score more when it first happens. As time passes, the affect lessens and your score can increase slightly.

After an account has been charged off, creditors will often use third-party debt collectors to try to collect payment from you. A collection status is then entered onto your credit file so now you have two big negative items - a charge-off and a collection - all on the same account. This does not bode well at all on your credit score.

As you can see from the breakdown of payment history factors, the more severe the deliquency, the more money that is past due, and the more recent the collection all produce a devistating hit to your credit score. Since FICO keeps the actual point decrease for any infraction pretty close to the vest, we can't tell you exactly how many points your score will go down from a charge-off or a collection. But we can assure you it will be A LOT.

Can You Get a Collection Off Your Credit Report?

That is a great question! And the answer is yes....and no. It is obviously better to forgo the whole charge-off, collection path altogether, but we understand things happen and you just may have no choice. We have actually dedicated quite a few articles to the area of repairing your credit by removing negatives and collections. Check out some of these articles: