When it comes to managing debt, it's essential to understand the potential impact that debt collectors can have on your credit score.
Credit scores are numerical representations of an individual's creditworthiness, based on their financial history and behavior. In Australia, credit scores are provided by credit reporting agencies, including Equifax, Experian, and Illion.
Lenders and financial institutions use these scores to assess the risk associated with lending money to consumers. This information is made up of your history of repayments with credit products and utilities.
When you miss repayments, and if your provider cannot get in touch with you or agree to a repayment plan, they may outsource the chasing of this debt to a debt collector, or collections agency.
Put simply, a debt collector cannot directly affect or change your credit score, as this is the responsibility of the major credit reporting bureaus. However, the creditor you owe money to can report the late payment or default to these credit bureaus, which will hurt your credit score. Further, if a debt collector cannot contact you, they can still report a serious credit infringement against you to these bureaus, which may affect your credit score for many years.
Debt collectors and your credit score
When a lender or provider is unable to contact you by phone, or by sending you a formal notice in regards to outstanding debt, they will often outsource the job to a debt collector. The debt collector can try to reach you by phone, or they can attempt to contact you face to face. If they cannot get through to you by either method, they can only report back to the creditor but not directly report a payment default to the credit rating agency.
You should remember that debt collectors need to abide by specific rules and cannot harass you by repeatedly calling or visiting you, or by threatening to confiscate your possessions if you don’t pay up. Similarly, they cannot threaten to file a default against you, especially with a credit bureau. Again, only the party you owe money to should be able to report a default against you to the credit bureaus.
So, can debt collectors affect your credit score? No, they cannot do so directly. However, if you have taken out a line of credit or loan, or if you have made an agreement to meet repayments on utilities, such as an energy bill, you have an obligation to meet your repayments.
You also have an obligation to communicate financial difficulty and hardship to the creditor as well as to any involved debt collector. If you do not do these things, the creditor can report your behaviour to the credit reporting bureaus, and the debt collector may report a credit infringement against you. Creditors can also take the legal route, and a court judgment against you can also severely impact your credit score.
How payment behaviour affects your credit score
Each credit reporting bureau has its own methodology to assess your credit score but, generally speaking, they’re made up of these common factors:
- The length of your credit file;
- Accounts you have opened and closed, including the type and amount of credit you have applied for in the past;
- Your repayment history - positive and negative;
- Court writs, default judgments or bankruptcies if any.
If you are more than 14 days late to make a repayment, such as a mobile phone repayment or a car loan repayment, the lender can report this behaviour as a ‘late payment’ to credit reporting bureaus. Late payments can hurt your credit score, and can remain on your credit report for two years.
This then escalates if your late payment exceeds 60 days and the overdue payment exceeds $150. In this instance, the credit provider can report a default against your credit file. A default on your credit file can significantly hurt your credit score and remain on your report for five years.
Here is how long some negative events may be reflected in your credit history:
- Hard enquiries into your credit report - up to 2 years
- Late repayments - may last up to 7 years
- Collection or charged-off accounts - may last up to 7 years
- Bankruptcy - may last from 7 - 10 years
- Other events, including repossession and foreclosures - up to 7 years
What to do if a debt collector contacts you
If you’ve been contacted by a debt collector, the worst thing you can do is bury your head in the sand. The issue will not go away if you ignore it, and doing so can result in more severe impacts to your credit history and credit score.
In fact, the ACCC outlines that when a debtor is legally responsible for paying off a debt they legitimately owe, they should:
- Not attempt to avoid the obligation to satisfy debts they have incurred;
- Promptly contact creditors and debt collectors when they are experiencing financial difficulties and attempt to negotiate a variation in payments or other arrangement; and
- Be candid about their financial position, including any other debts.
A good course of action is to respond with honesty and see how you can work together to pay off the outstanding debt. Debt collectors and creditors understand that financial issues can occur. In fact, most banks and lenders have hardship support in place to assist when this occurs, including the implementation of payment plans or repayment freezes.