How a collection agency affects your credit score

As you may already be aware, a credit report is a means of giving creditors an indication of the level of risk certain businesses could pose to them should they lend them money. The correlation between a collection agency and a business’s credit score is significant in that any involvement with a collection agency will inevitably affect a borrower’s credit score negatively. 

Here, we’ll discuss in more detail the impact collection agencies have on business credit scores, specifically looking at the factors that influence the severity of this impact and ways to ensure your credit score is maintained.   

What is a collection agency?

Firstly, let’s take a look at what a collection agency is. A collection agency is a company that collects debts from businesses and can be hired by creditors to collect these debts. 

It is a third-party organisation that can act as an intermediary between creditors and businesses that owe money. Collection agencies usually become an option once a creditor has made several attempts to collect money owed to them and they have not been successful. 

Collection agencies will find a way to get in touch with the business that owes money to negotiate a repayment plan. If the business is not cooperating with the collection agency, the agency is within its rights to take further legal action. The collection agency will then charge a fee to creditors, which could be a percentage of the debts collected, to pay for its services.

It is important to note that collection agencies are not considered bailiffs and do not have any special legal authority to enforce debt collection. There is a separate process for this that a creditor would need to go through to start this process.  

Direct impact of a collection agency and credit score

Any time a collection agency is contacted by a creditor to collect debt from a borrower, it will have a negative impact on the borrower’s credit score. 

Delinquent debt refers to any debt that is past its due date, which is usually past 30 days or more, and can be debt linked to credit cards, loans and even utility bills. This will inevitably have a direct negative impact on a business’s credit score. 

Further to this, a business’s credit score will be negatively impacted by any debt collection being reported to credit agencies because once this is done, there is a negative mark left on the credit file. 

Another important aspect of the type of impact a collections agency has on credit scores is the significance of the collection account status. For example, is it open, closed, or paid? So, the status of the collection account will also determine the type of impact a credit score would undergo. 

Negative entries on a credit report 

Let’s expand on this a little. Any negative entries on a credit report include missed payments, loan defaults, accounts in collections, court judgements, settlements, debt solutions and court action. 

Negative entries on a credit report will remain on the credit file for six years, which will automatically have a negative impact on any financial opportunities in the future for companies looking to borrow funds. Let’s take a look at these in more detail below. 

Accounts in action

Accounts in action refer to any debts that are transferred to a debt collection agency due to being in default. This will remain on a borrower's credit report as a payment missed, which will negatively impact a borrower’s credit report, too.

When a company has accounts in collection, it shows that they have failed to make payments and shows that there is a possibility of insolvency. A lender will need to know this information because they’ll be given a wider picture of the company’s attitude to borrowing, repayments and any red flags.  

Court judgment

A county court judgement (CCJ) is an official court order that is requested by creditors when they are owed money by their borrowers but have failed to pay. At this point, the creditor would have already attempted to collect the payment or tried to reach an agreement with the borrower on how the debt could be paid, but they have not yet been successful in doing so. 

When a company is issued with a CCJ, it will be recorded at the Register of Judgments, Orders and Fines as well as on the company’s credit file. If the company is able to pay its debt within 30 days of the CCJ being given, it can apply for it to be removed. If it doesn’t, then it will remain on the company credit file for six years. 

So, now it is easy to see the negative impact that having a collection agency can have on a company’s credit score and that businesses need to do everything within their power to avoid this happening. 

The impact of not paying a collection account

We can now see that there are various repercussions of not paying your debts on time, especially if you’re subject to a collection agency negatively impacting your credit score by requesting payments for collection accounts. 

As mentioned above, the consequences for not paying your collection accounts include: 

• Credit score impact (this has been mentioned a few times, and is arguably the most obvious consequence of not paying off your debts).
• Court action (this may happen if the creditor takes further action due to the borrower not paying the money back).
• Bailiffs and asset seizure (this is the next step in the process if the borrower still refuses to pay back their debts). 
• Enforcement measures (including charging orders, attachment of earnings orders, or third-party debt orders). 

How to avoid collection agencies negatively affecting your credit score

The most obvious strategy to avoid collection agencies negatively affecting your credit score is to ensure that you make all payments on time and to pay off your debts as soon as possible.  But there are also a few other ways you can minimise the effects of collection agencies. 

Make sure that you regularly check your credit reports to ensure there aren’t any errors, and if there are, that you dispute these inaccuracies to ensure your credit report is accurate. 

Preventative measures 

• Make your payments on time.
• Review your credit reports regularly to identify any inaccuracies as soon as possible.

Debt management

• Seek professional debt advice to avoid the possibility of your debts going into collections.

Addressing collection agencies

• Pay your debts as soon as possible if it has been referred to a collection agency. 
• Negotiate with the collection agency if you’re unable to pay the full amount by negotiating a settlement agreement. 

It is crucial that you  don’t ignore any communications received from collection agencies in order to avoid any further actions (such as court actions). If, for some reason, you feel that the debt is illegitimate or incorrect, you’ll need to dispute the debt with the collection agency. 

Importantly, if your company is struggling to resolve its debt issues, be sure to seek help from debt advisors. 

Creditserve’s credit check packages will help you run credit checks on any company you may want to work with. With our services, you’ll be able to assess the risk efficiently, making informed decisions that allow you to mitigate financial risks. 

Contact us at 01992 414222 for more information!