How Much Will Collections Affect a Credit Score?

A collection account on a credit report signifies a debt that has become significantly delinquent and has been transferred to a collection agency. This situation arises when an individual fails to make timely payments to an original creditor, such as a bank or utility company. The presence of a collection account indicates a heightened risk to lenders, as it represents a history of unpaid obligations. Understanding how these accounts function and their influence on financial standing is important.

Understanding Collection Accounts

A collection account is a record of a defaulted debt that a creditor has turned over to a collection agency for recovery. When a payment is missed, the original creditor attempts to collect the overdue amount through various methods, including notices and direct contact. If these efforts prove unsuccessful after 90 to 180 days of non-payment, the creditor may transfer the debt to an in-house collection department, sell it to a third-party collection agency, or assign it for collection.

Once a debt is transferred, the collection agency assumes responsibility for pursuing payment from the debtor. Common types of debts that result in collection accounts include unpaid medical bills, credit card balances, personal loans, student loans, and utility bills. The original creditor may sell the debt to the collection agency or hire the agency to collect on their behalf. The collection agency then notifies the credit bureaus that they have taken over the debt, leading to its appearance on the individual’s credit report.

Direct Impact on Credit Scores

The appearance of a collection account on a credit report is a negative event that can lower credit scores. Credit scoring models, such as FICO and VantageScore, consider payment history as a primary factor in determining a score, often accounting for approximately 35% of the calculation. A collection account indicates a lapse in payment obligations, signaling increased risk to potential lenders.

The initial impact of a new collection account can cause a credit score to drop by as much as 100 points or more. This immediate decline is more pronounced for individuals who previously maintained a strong credit history. Conversely, someone with an already lower score might experience a smaller proportional drop, as their score already reflects existing financial challenges. A collection account, regardless of the original amount owed, can impair creditworthiness.

Factors Affecting Severity

While any collection account negatively impacts a credit score, several factors can influence its severity. The original amount of the debt can play a role, with larger collection amounts having a more severe impact. However, some newer scoring models may disregard collection accounts below a certain threshold, such as $100 for FICO Score 8, or $250 for VantageScore versions 3.0 and newer.

The age of the collection account also affects its severity; newer collections have a greater negative influence than older ones. The impact of a collection on a credit score lessens over time as the account ages on the credit report. An individual’s overall credit profile can also modify the impact; for those with a previously strong credit history, a collection can cause a greater score reduction compared to someone who already has multiple derogatory marks.

Regarding the type of debt, medical collections have seen specific changes in how they are treated by credit scoring models. Some newer models, like FICO Score 9 and the VantageScore 4.0 model, may weigh medical collections less heavily or disregard them under certain conditions. For instance, paid medical collections and unpaid medical collections with an initial balance under $500 are no longer included on credit reports by the major credit bureaus.

Credit Report Appearance and Duration

Collection accounts are listed on credit reports as separate tradelines, appearing under a derogatory marks section. This entry will specify the name of the collection agency, the current and original balance, the payment status, and the original creditor. The account may also indicate the date it was first reported or placed in collections, which is distinct from the date of original delinquency.

A collection account can remain on a credit report for up to seven years from the date of the original delinquency that led to the collection. This seven-year period begins from the first missed payment date that initiated the collection process, not from when the account was sent to collections or when it was paid. Even if the collection account is paid, it will remain on the credit report for this seven-year duration. While paying off a collection does not remove it, its negative effect on credit scores may lessen, and some newer credit scoring models may disregard paid collections entirely.