How Much Does a Collection Agency Ruin a Credit Score?

Credit scoring formulas take various credit-related factors into account, like the number of accounts you have, your available credit lines, account use and payment dates. The "Payment History" category is 35 percent of your score, and it encompasses many things beyond your payment dates. The percentage also includes things like court judgments, bankruptcies and accounts placed with collection agencies, according to MyFICO.com

Collection Agency Reporting

The Experian, Equifax and TransUnion credit bureaus draw information for your credit reports from many sources, like banks, credit unions, finance companies and other firms that loan money or issue credit cards. Collection agencies report to the bureaus when they take over accounts. You end up with two bad entries on your reports if a credit card issuer or loan company sells your debt to a collector. Your file shows the original account, including delinquent payments, and the collection entry.

Credit Score Impact

Your credit score runs from a possible high of 850 down to 300, and collection agency entries in your credit files can knock it down by at least 100 points, according to CNNMoney's David Ellis. The score reduction may cost you money if your score is already borderline from the late payments that caused your account to be sent to a debt collector. The lowered score can mark you as a subprime borrower, subjecting you to higher interest rates on loans and credit cards or causing outright rejection of your credit applications.

Solution

Collection agencies add their accounts to your credit reports and can also remove the bad entries. Come to a settlement agreement with the debt collector if you want to clean up your credit reports, and insist on erasure of the bad credit entry as part of the deal. Collectors may agree verbally just to get your payment, but they don't always follow through. Make sure you withhold or delay your payment until you get the removal promise in writing.

Considerations

Collection agency accounts are not always related to accounts that are already on your credit reports, Ellis warns. Obligations like medical bills, unpaid parking tickets, bounced checks and even old library fines can get set to debt collectors and show up in your Equifax, TransUnion and Experian records. These accounts damage your credit in the same way as collections related to credit cards and loans.

Warning

Your credit score does not completely rebound after collection removal if your credit report still shows the original account. You still feel some impact from the late payments and eventual charge-off by the original creditor before it sold the account to the debt collector.