Sunday, November 11, 2012

How Much Does One Collection Affect Your Credit Score?

Few people have gone through life without making at least one financial mistake or suffering as a result of someone else's financial mistake. Collections and how they affect your credit score is just one of many examples of little mistakes that have big consequences.

Like this...but with money. Ouch.
It's the financial equivalent of an unplanned pregnancy. Whoops!

Of course, the number of points you'll lose off your credit score will vary depending on the amount of the collection and the other entries on your credit report.

How Much One Collection Affects Your Credit Score

Just try looking this up and you'll discover that getting a number, even a ballpark figure, is close to impossible (but I am going to give you ballpark figures). There are two reasons for this:

Reason # 1:  Everyone's credit is different, and just like an equation with different numbers plugged in, the impact differs depending on the length of your credit history and how high your credit score was when the collection agency reported your debt to the credit bureaus.

Reason #2:  The FICO scoring formula is the biggest trade secret since the Coca-cola formula. Even if I know the formula and exactly what was on your credit report, I probably still wouldn't be able to tell you. I haven't delved deeply into mathematics since college, so there's a better than good chance that I'd screw it up repeatedly and do nothing more than frustrate us both in the process.

Collections Hit Those With High Credit Scores the Hardest

As backwards as it may sound, it hurts your credit much more to make one small mistake after displaying years of exemplary credit behavior than to add a collection to a credit report that's already peppered with the things. Lets look at a couple of examples.

Jimmy Smith is responsible. He has steady employment, a long credit history, carries a good balance of debt and always makes his payments on time. He has a credit score of 802. A case of mistaken identity results in another Jimmy Smith's collection account for $750 appearing on his credit report. Overnight Jimmy's score drops from 802 to 687.

Jane has had a run of bad luck. After she lost her job she couldn't keep up with her debts and several of them went to collections. Her credit score is 593. When a new collection for $750 dollars appears, Jane's score drops to 561.

There is no difference in the amount of the collection that appears on both Jimmy and Jane's credit reports. The only difference is that Jimmy has a solid credit history and score while Jane's is considerably tarnished. The end result? Jimmy loses over 100 credit points while Jane loses just over 30.

Kinda seems like a punishment for good behavior, doesn't it? Keep in mind that, in most cases, your credit report will show a slew of missed payments from the original creditor before the account is ever even transferred to collections. This can and will shave points off your credit score long before a collection appears on your file.

Collections Under $100 May Not Hurt Your Credit Scores

The Fair Isaac Corporation periodically updates the scoring formula. The most recent of these updates, which occurred in 2009, changed the way the FICO scoring system evaluates collection accounts. According to FICO, a single small collection (like an unpaid library fee), doesn't make an individual a bigger default risk to banks and credit card companies. Thus, the scoring system completely ignores collections under $100.

Now, here's where things get tricky. I am hearing through the grapevine that lenders aren't using the new FICO system. I'm going to look into this further and I'll report more information when I have it. If anyone has any information about this, feel free to post a comment and share what you know.

Related Posts:

What is a Key Derogatory on Your Credit Report?

Why Credit Bureau Collection Disputes Rarely Work


  1. My credit score is over 800 and my ex stopped paying a debit that I co-signed (original debt 32,000 balance 5,000) how much will it lower my score if I do not pay?

    1. That depends on a variety of factors. Your current credit score, however, is the key in coming up with an estimate of how much this will hurt you, and with a credit score as high as yours, its going to hurt a lot. The higher your credit score is, the more damage you'll sustain from negative entries.

      I haven't seen your actual report (because the types of accounts, amount of your debts, etc all have an impact) but if I had to guess, I'd say that the first payment you miss is going to hit you for over 100 points. It's straight downhill from there. I know its infuriating to have to pay your ex's debt, but its something you're simply going to have to do if you want to salvage your credit and protect yourself from a potential lawsuit.

      Talk to an attorney. You may have grounds to sue your ex for the amount you end up paying. Best of luck.