How Many Points Will a Collection Affect Your Credit Score?

A collection account on your credit report is a serious negative mark that can significantly lower your credit score. Understanding the potential impact and what you can do about it is crucial for maintaining good financial health. This article provides a comprehensive overview of how collections affect your credit score, the factors influencing the point drop, and strategies for minimizing the damage.

Understanding Credit Scores and Their Importance

Before diving into the specifics of collections, let's briefly review credit scores and why they matter. Your credit score is a three-digit number that represents your creditworthiness. Lenders use it to assess the risk of lending you money. A higher credit score generally means you're a lower-risk borrower and are more likely to be approved for loans, credit cards, and other financial products at better interest rates.

Two primary credit scoring models are widely used: FICO and VantageScore. While the exact formulas differ, both models consider similar factors:

• Payment History: This is the most important factor, accounting for about 35% of your FICO score. Late payments and defaults, including collections, have a significant negative impact.
• Amounts Owed: This refers to the total amount of debt you owe and your credit utilization ratio (the amount of credit you're using compared to your total available credit). It accounts for about 30% of your FICO score.
• Length of Credit History: A longer credit history generally benefits your score. This accounts for about 15% of your FICO score.
• Credit Mix: Having a mix of different types of credit (e.g., credit cards, installment loans) can positively influence your score. This accounts for about 10% of your FICO score.
• New Credit: Opening too many new accounts in a short period can negatively impact your score. This accounts for about 10% of your FICO score.

What is a Collection Account?

A collection account arises when you fail to pay a debt, such as a credit card bill, medical bill, or utility bill, and the original creditor sells or assigns the debt to a collection agency. The collection agency then attempts to recover the debt from you.

The process typically unfolds as follows:

1. Delinquency: You miss one or more payments on a debt.
2. Charge-Off: After a certain period (usually 180 days for credit card debt), the original creditor will "charge off" the debt, meaning they write it off as a loss on their books.
3. Collection Agency Involvement: The creditor may then sell the charged-off debt to a collection agency or hire a collection agency to pursue the debt on their behalf.
4. Reporting to Credit Bureaus: The collection agency reports the collection account to the major credit bureaus (Equifax, Experian, and TransUnion).

How Many Points Will a Collection Account Affect Your Credit Score?

There's no single answer to this question. The impact of a collection account on your credit score depends on several factors:

1. Your Existing Credit Score

This is arguably the most significant factor. If you have a high credit score (e.g., 750 or higher), a collection account will likely cause a more substantial drop than if you have a lower score. This is because you have more points to lose.

Imagine a scenario: Person A has a credit score of 780, and Person B has a credit score of 650. Both have a $500 collection account reported. Person A might see a drop of 70-100 points, while Person B might only see a drop of 40-60 points. Person A's excellent credit profile had further to fall.

2. The Age of the Collection Account

The older a collection account is, the less impact it has on your credit score. Credit scoring models place more weight on recent information. A collection account that is several years old will have less of an impact than one that is just a few months old.

Keep in mind that most negative information, including collections, remains on your credit report for seven years from the date of the original delinquency (the date you first missed the payment that led to the collection). After seven years, it must be removed.

3. The Amount of the Debt

While a collection account of any amount is detrimental, larger debts generally have a greater impact on your credit score than smaller debts. A $5,000 collection account will likely cause a larger drop than a $500 collection account, all other factors being equal.

However, it's important to note that even small collection amounts can significantly damage your credit. Don't underestimate the negative impact of a seemingly insignificant debt.

4. The Type of Debt

Some types of debts may have a slightly greater impact than others. For instance, a collection account related to a credit card or loan might be viewed more negatively than a collection account related to a utility bill or a small medical bill, though this is not always the case and depends on the scoring model used.

5. The Credit Scoring Model

The specific credit scoring model used (e.g., FICO 8, FICO 9, VantageScore 3.0, VantageScore 4.0) can also influence the impact of a collection account. Different models weigh factors differently. For example, newer versions of FICO have lessened the impact of paid collections (more on this below).

The Average Point Drop: A General Estimate

While the exact number of points a collection account will drop your credit score varies, a general estimate can be provided.

• For individuals with excellent credit (750+): A collection account could drop your score by 70-100+ points.
• For individuals with good credit (680-749): The drop might be in the range of 50-80 points.
• For individuals with fair credit (620-679): The drop could be 40-60 points.
• For individuals with poor credit (below 620): The impact might be less pronounced, perhaps 30-50 points, as the score is already lower.

Remember, these are just estimates. The actual impact could be higher or lower depending on the specific circumstances.

What to Do If You Have a Collection Account on Your Credit Report

Having a collection account on your credit report can be stressful, but there are steps you can take to mitigate the damage and potentially remove the account.

1. Verify the Debt

The first step is to verify that the debt is valid. Within 30 days of receiving the initial communication from the collection agency, send them a written request for validation. This requires them to provide proof that the debt is yours, that they have the legal right to collect it, and that the amount they are claiming is accurate.

If the collection agency cannot provide sufficient validation, they must stop collection efforts and remove the account from your credit report.

2. Dispute Errors

Carefully review your credit report for any inaccuracies related to the collection account. This could include errors in the amount owed, the date of the original delinquency, or even the fact that the debt is not yours.

If you find any errors, dispute them with the credit bureaus (Equifax, Experian, and TransUnion). The credit bureaus have 30 days to investigate your dispute. If they find that the information is inaccurate, they must remove or correct it.

3. Negotiate a Pay-for-Delete Agreement

A pay-for-delete agreement is an agreement with the collection agency to remove the collection account from your credit report in exchange for payment of the debt. While not all collection agencies are willing to enter into these agreements, it's worth trying to negotiate one.

Important: Get the agreement in writing *before* you make any payments. Ensure the agreement clearly states that the collection agency will remove the account from your credit report upon receipt of payment.

4. Pay the Debt (Even Without a Pay-for-Delete)

Even if you can't negotiate a pay-for-delete agreement, paying the debt is still a good idea. While it won't immediately erase the negative impact on your credit score, it will stop the debt from accruing further interest and potentially leading to legal action.

Furthermore, some newer credit scoring models (like FICO 9) give less weight to paid collection accounts. In some cases, a paid collection account might not even be considered at all. However, the fact that the collection was there will still affect your credit for the duration of the 7 years.

5. Seek Professional Help

If you're struggling to deal with collection accounts or other credit problems, consider seeking help from a credit counseling agency or a credit repair company. These professionals can provide guidance and assistance in managing your debt and improving your credit score.

The Impact of Paid vs. Unpaid Collections

As mentioned earlier, the impact of a paid collection account is often less severe than that of an unpaid collection account. While the collection will still appear on your credit report for seven years, paying the debt demonstrates a willingness to take responsibility for your financial obligations.

Some credit scoring models, like FICO 9, completely ignore paid collection accounts. This means that if you pay off a collection, it won't negatively affect your score under these models. However, many lenders still use older versions of FICO, so paying off the debt is not a guaranteed solution.

Preventing Collection Accounts in the Future

The best way to avoid the negative impact of collection accounts is to prevent them from happening in the first place. Here are some tips:

• Pay your bills on time: Set up automatic payments or reminders to ensure you never miss a due date.
• Stay within your budget: Create a budget and stick to it to avoid overspending and accumulating debt.
• Communicate with creditors: If you're struggling to make payments, contact your creditors and explain your situation. They may be willing to work out a payment plan or offer other assistance.
• Monitor your credit report regularly: Check your credit report at least once a year to identify any errors or signs of fraud. You can get a free copy of your credit report from each of the three major credit bureaus annually at AnnualCreditReport.com.