Question about collection and score increase

[iamrayl]

I signed up for scorewatch on 04/14/08.  At the time I had a 120 days derog on a Dell account and my EQ score was 510.  I got an alert from sw on 05/14/08 saying that there was a change on my eq report, Dell had charged off the account and sent it for collections.  My score went up to 570 that same day.  Has anyone experienced this? I thought a collection/charge off was supposed to be a big negative hit on the credit score?  I'm just hoping that I won't get hit with a big score drop when I run my reports again at the end of the month. 

[Anonymous]

I'm no expert, but here's my guess.

When Dell was showing late with a balance, it factored into your utilization. For example, let's say Dell was reporting a balance of $1,000, and your only other tradeline was a credit card with a $1,000 limit and a $90 balance. Your utilization would be 109%, since you owed $1,090 on a total open credit limit of $1,000.

When Dell charged off the account, they then report a $0 balance. Your utilization drops to 9%, since you have a $90 balance on a $1,000 credit limit.

The 120 days was already a pretty big derogatory, so the hit from going to charge off was smaller than the gain from the lower utilization.

[iamrayl]

Makes sense but if Dell sells the account to a CA, will that cause my score to drop?

[Anonymous]

Probably. The balance on a collection agency account won't affect your utilization, but the mere presence of a collection account will lower your score.