When a person owes a debt to a creditor and the debt becomes delinquent, the creditor will often choose to classify the person's account as a "collection account." This means that the creditor will likely need to take specific collection actions to retrieve payment of the debt. While having a collection account does not by itself hurt your credit, having a delinquent debt reported to a credit bureau will cause your score to fall.
Credit Reports
The information used to determine a person's credit score is contained within their credit report. The credit report is compiled mainly from information reported to credit bureaus by lenders. All legitimate loans that a person takes out will be reported on a person's credit report, as will a record of whether the money was paid back. Negative information, such as delinquent loans, can only be kept on a credit report for a maximum of seven years.
Credit Score
Using the information contained in a credit report, credit bureaus assign all borrowers a credit score, which measures the person's creditworthiness---the likelihood that he will pay back a loan. Paying back loans on time will raise a person's score, while being delinquent in repayment will lower the person's score. The formula for calculating a credit score is secret. The exact amount that a delinquent account will lower a person's score will depend on many factors, including the size of the debt and the length of time it is late, as well as the rest of the borrower's credit history.
Credit Reporting
A collection account will only count against a person's credit score if the lender reports the account to the credit bureau as late. Generally, most lenders will update credit bureaus regularly on the status of outstanding loans. However, if, for any reason, the creditor failed to report the loan as delinquent, the information will not be included on your credit report and will not affect your credit score.
Collection Actions
The actions that a company takes to collect a debt are not typically reported on your credit report. However, if the company repossesses an object that the loan was used to pay for, such as a car or a house, this seizure will be noted on your credit report and harm it accordingly. Similarly, if a creditor chooses to write off a delinquent debt, this action will also be noted and drag down your score.
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