Do Debt Collecting Agencies Affect Your Credit Score?

Original creditors have the recourse of turning over or selling unpaid credit account balances to debt collectors and debt buyers. These debt collecting agencies can affect your credit score in several different ways. Your credit score reflects the negative impact of debt collection activities in both the credit account listings and public information sections.

Credit Scores

Credit scores are calculated based on negative and positive information in your credit file. Credit reporting agencies compile the information through reports from collecting agencies, original creditors, debt buyers, public records and information that you provide to potential lenders. Each reporting agency calculates the scores slightly differently, but payment history is the largest single contributing factor in each calculation. Negative account entries, such as delinquencies, defaults and charge-offs, all affect payment history.

Collection Agencies/Debt Buyers

Accounts that are in default by more than six months with the original creditor are often turned over to a collection agency. The collection agency may be an in-house department of the original creditor or a third-party collector. If the third-party collector is unsuccessful in collecting the debt, the original creditor may choose to sell the outstanding balance to a debt buyer. Original creditors, third-party collection agencies and debt buyers can report defaulted debt to all three credit reporting agencies. Third-party collectors' and debt buyers' credit report account listings are additional listings to the original creditor's listing, which results in several negative entries against your credit score calculation for one account.

Negative Account Entries

Negative credit report entries by original creditors are often listed as delinquencies. Once the original creditor turns the account over to a collection agency, the negative entries can be listed as a default or a charge-off. Collecting agencies and debt buyers list the accounts collections, defaults or charge-offs. Negative account entries must be removed from your credit file seven years after the first delinquency with the original creditor.

Judgment

Another way that collecting agencies can affect your credit score is to file a lawsuit and win a judgment against you for the unpaid debt. Judgments are listed separately from account listings on a consumer's credit report. As part of the public record section of your credit file, judgments are included in the report for a minimum of seven years. If your state allows judgments to be renewed or to be valid for longer than seven years, they will remain on your credit report and negatively affect your score for as long as they are valid. In addition to the credit rating impact, judgments may allow collecting agencies to seize property, garnish wages and levy accounts to collect the debt. Judgment laws vary by state.