How Does Credit Collection Ruin a Credit Rating?

If you leave a credit card debt unpaid, the credit card company will send the account first to its in-house collection department and then to a third-party collection agency. Collection accounts appear on your credit report and, depending on the other information contained within your credit records, can ruin your good credit history.

Credit Reporting

In-house collection departments are owned by the credit card company. When a credit card company transfers your unpaid balance to an in-house collection department, it doesn't appear on your credit report. The missed payments leading up to your account being sent to collections, however, have a considerable adverse impact on your scores.

According to the Fair Isaac Corp.'s credit scoring criteria, the payments you make to your creditors have a more significant impact on your credit rating than any other factor. Thus, the more payments you miss, the further your credit score falls.

Charge-Off

If the in-house collection department is unsuccessful recovering your unpaid balance, the company charges off the delinquent account. A charge-off does not mean that you no longer owe the debt. A charge-off signifies that the company would rather claim your debt as a business loss than continue spending time and resources to recover it.

Charge-offs appear on your credit report within the original credit card trade line. A charge-off remains on your credit report for seven years and has a negative effect on your credit scores.

Collection Accounts

Third-party debt collectors, such as collection agencies, routinely purchase charged-off credit card accounts. After purchasing your account, the collection agency adds its own separate trade line to your credit report. Collection agency trade lines are always derogatory.

The credit damage you will incur from having a collection account appear within your credit history varies depending on the other information reflected in your credit records. In general, the higher your credit score was before the collection agency added its account, the more damage it will do. Collection accounts can remain within your file for seven years from the date the original creditor charged-off the account.

Lender Reviews

The credit bureaus do not maintain credit reports as a service to consumers. Credit reports are a business service intended to assist lenders in evaluating applicants' risk level. Over time, older notations impact your credit score to a lesser degree -- but evidence of your defaulted debt appears within your report for the full reporting period. Thus, lenders will see evidence of your past mistakes managing your debt on your credit report and take this data into consideration -- regardless of how much your credit score has improved in the interim.