How Many Points Does a Collection Drop Your Credit Score?
Allowing a debt to go to a collections agency can have a significant impact on your credit score.
Contributing Writer at Tally
April 21, 2022
If you have a bill that is significantly past due, you may have started receiving phone calls from debt collection agencies. When this happens, it means that the lender who was owed the original debt sold the outstanding debt to a debt collector. At this point, the bill has “gone to collections.”
The debt could be from medical bills, student loans, credit cards, etc.
It’s important for you to know how a bill in collections impacts your personal finances. Specifically, you should consider questions like, “How many points does a collection drop your credit score?” To help you answer that, we’ll offer a high-level overview of what happens when a bill goes to collections.
We’ll also answer frequently asked questions regarding collections, touching on what a credit score is and what debt collection is. You can also read about possible alternatives that may help prevent you from going to collections in the first place.
What is a credit score?
A credit score is a three-digit number that measures your creditworthiness. The higher your credit score, the more lenders can trust you with borrowed money. There are two primary types of credit scores: FICO Scores and VantageScores.
FICO breaks down its credit score ranges in the following manner:
Exceptional credit score: 800 to 850
Very good credit score: 740 to 799
Good credit score: 670 to 739
Fair credit score: 580 to 669
Poor credit score: 300 to 579
VantageScore breaks down its credit score ranges in the following manner:
Excellent credit score: 750 to 850
Good credit score: 700 to 749
Fair credit score: 650 to 699
Poor credit score: 550 to 649
Very poor credit score: 300 to 549
Before we can answer the question, “How many points does a collection drop your credit score?” it’s important to first understand what factors make up the respective scores.
The FICO credit scoring model determines scores based on the following:
Payment history: 35%
Amounts owed: 30%
Length of credit history: 15%
New credit: 10%
Credit mix: 10%
The VantageScore scoring model is a bit more ambiguous as it doesn’t define exact percentages. However, certain factors are noted as being more influential than others:
Extremely influential: total credit usage, balance and available credit
Highly influential: credit mix and experience
Moderately influential: payment history
Less influential: age of credit history and new accounts
The way you handle your outstanding credit is reported to the three credit bureaus — Equifax, Experian and TransUnion. This information then makes its way onto your credit report. The information on your credit report is used by FICO and VantageScore to determine your credit score.
What is debt collection?
Debt collection is a tool used by lenders and creditors to recover funds that are past due. If you have an unpaid debt, your lender may sell it to a debt collection agency. They normally sell it for pennies on the dollar as a way to cut their losses.
A debt collector’s job is to get you to repay your balance. They buy the debt for a fraction of what it’s worth, so the more they can get you to repay, the better off they are.
Although there are rules they must abide by as outlined in the Fair Debt Collection Practices Act, debt collectors can still be aggressive in their pursuit to recover outstanding debts. They are not allowed to call you past a certain time or use derogatory language, however, they are known for being pushy, if not harassing, and can cause a lot of stress in your life.
What happens when a bill goes to debt collection?
If a bill goes into debt collections, you can expect a few things to happen. For one, a debt collector will begin calling you in an effort to get you to repay your outstanding balance. Additionally, the collections agency will also report the late payments to the credit bureaus. As we’ll detail below, this will have an impact on your credit score.
Should your debt end up in collections, it’s important that you make efforts to repay it. Otherwise, the collections agency could sue you for the outstanding balance. If you lose the case, you could be ordered to pay the entirety of the balance. The collections agency may also be granted the ability to use tactics like wage garnishment to obtain payment.
It’s worth noting that debt collections are specifically different for medical bills. Typically, overdue credit card debts are sent to collections after about six months. At this point, the information will end up on your credit score where it will then stay for seven years based on when the delinquency occurred.
However, medical bills sent to debtors are removed from your credit report immediately upon paid collection. Additionally, there is a one-year grace period between the debt being sent to collections and it appearing on your credit report.
How many points does a collection drop your credit score?
The exact number of points that a collection will drop your credit score depends on other factors, such as whether this is the first instance of this occurring and whether you have a good credit score to begin with. Some estimate that having a missed payment reported by a collections agency can result in a score drop of 110 points.
Having said that, an account in collections is reported as a late payment. This alone makes up 35% of your FICO score and is considered moderately influential on the VantageScore model. However, there may be a ripple effect as well. Your issuer may close your original account. This will lower your available credit limit, which will, in turn, lower your credit utilization score. Your credit report will also show a closed account.
A low credit score will impact your ability to secure future lending. Lenders need to perform a hard inquiry on any new account. Seeing a bill in collections may give them pause before approving you. You may face difficulties opening things like new credit card accounts, auto loans and mortgages. Even if you are approved, you may face higher interest rates.
Are there any alternatives to debt collections?
Fortunately, there are some alternatives available that can prevent your account from going to collections.
Pay down your debt
The best thing you can do to prevent a debt from going to collections is to start paying down your debt. Even a single payment can signal to your original creditor that you’re working to repay your balance. Your creditor doesn’t want to send the debt to collections since this means that they’re cutting their losses and won’t receive full repayment.
Negotiate with your lender
If you know you can’t repay your balance in full, you may want to consider negotiating with your lender. Some lenders may be willing to accept a payment plan or arrangement where you either agree to spread the balance out over a certain period, compromise on the amount that you owe or both.
For instance, let’s say that you owe $10,000 in debt. Before sending the bill to collections, the lender may agree to let you pay 16 monthly payments of $500 for a total of $8,000. They waive the remaining $2,000 and agree not to charge you penalties or interest as long as you make payments on time.
Use debt consolidation loans or balance transfer cards
There are other tools available to help you pay down your balances. A debt consolidation loan, for instance, allows you to pay down your balance before it gets to collections. Your credit score will take a brief hit as you open the new account, but it may be worth it.
You may find that the debt consolidation loan has a lower interest rate than your current debt, and it prevents the account from going to collections. You can build a budget and make on-time payments on the loan to see a credit score increase.
Balance transfer cards are very similar. You transfer your existing balances to a credit card that typically comes with a promo APR, like 0%. This provides you with a grace period where you can pay down your balance without having to worry about being charged interest.
Being responsible with debt can prevent debt collections
Managing outstanding debt can be challenging. You may have financed unexpected expenses using methods like a credit card or personal loan. If you’re unable to repay your lender, you will be charged penalties and interest. In a worst-case scenario, the unpaid debt will be sold to a debt collection agency.
Having a bill go to collections can cause harm to your credit score. The exact amount that your score is harmed will depend very much on your credit history. It’s important to make efforts to keep bills out of collections by negotiating with your lender or considering other options, like debt consolidation loans or balance transfer cards. These won’t absolve you of your debt, but they’ll prevent a collection account from appearing on your credit report.
One other tool that you may want to consider is the credit card payoff app from Tally†. Tally’s app helps you pay down debt quickly and efficiently. The app can also help manage your due dates so you can make on-time payments and keep your account in good standing.
Additionally, be sure to sign up for Tally’s newsletter, which delivers the latest financial tips directly to your inbox.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.