The fact that lenders routinely use credit scores to help them in their decision making processes is well known. For example, when you walk into a car dealership to finance a new vehicle you expect your credit report and score to be pulled.
However, lenders aren’t the only ones who are able to look at your credit reports. Many other types of companies are able to access your credit reports and scores, often without your knowledge or even your permission.
Collection agencies fall into this category. They can access your credit reports and scores, whether you like it or not.
Is it Legal?
It’s pretty common to feel angry when you first learn that collection agencies can access your credit without your permission. You may even wonder, “Is this legal?”
The answer, disturbing though it may be, is YES. It is completely legal for a collection agency to access your credit information without your knowledge or permission if it will be used to aid their collection efforts.
The Fair Credit Reporting Act (FCRA) defines a series of “permissible purposes” for accessing consumer reports, including credit reports. The Act states that any consumer reporting agency (this includes the credit bureaus) “may furnish a consumer report…to a person which it has reason to believe intends to use the information in connection with…collection of an account.” (FCRA) [15 U.S.C. § 1681b]
Why Collection Agencies Use Credit Reports
Skip Tracing: Pulling credit reports allows collection agencies to locate hard to find consumers. Your credit reports list your current and former addresses – very useful information for a collection agency that is trying to find you in order to collect a debt.
Determining What You Can Afford: Collection agencies also may review your credit reports in order to evaluate your ability to pay them. Doing so helps collection agencies to determine whether or not you can afford to pay what you owe and even whether or not you may be a good candidate to sue.
Why Collection Agencies Use Credit Scores
Many collection agencies and creditors also rely on specialized types of credit scores, such as Collection Scores, to help increase their profitability.
Collection scores help collection agencies save time and money by identifying which debtors are more likely to actually pay back their debts. If your collection credit score indicates that there is a high probability of you paying back an outstanding debt then a collection agency will probably focus more effort on contacting you than it would for someone else who is less likely to pay.
Credit Score Impact
You probably familiar with the fact that when someone accesses a copy of your credit report a record of the access, known as an inquiry, is posted. Soft inquiries, such as when you pull a copy of your own credit for review purposes, will not damage your credit scores.
On the other hand hard inquiries, such as those that occur when a lender pulls a copy of your credit reports during a loan application, can lower your scores.
Collection inquiries are variable, which means they are sometimes listed as soft inquiries and other times listed as hard inquiries. If they’re listed as soft inquiries then no harm, no foul. However, if they are listed as hard inquiries then there is a chance they can ding your scores.