You May Be Able to Get Collection Accounts Off Your Credit Report Sooner Than You Think

A collection account can drag down your credit score for several years — but not always.

While shopping for a home to buy, Ryan discovered through his credit monitoring service that a collection account had hit his credit reports. His credit score dropped, and he was worried it could jeopardize this ability to get a mortgage. “I had no idea what it was,” he says. He wanted it off his credit.

After doing some research online, Ryan (he asked his last name not be used to protect his privacy) connected with Michael Bovee of Consumer Recovery Network, who helped him negotiate with the collection agency to resolve the account.

Bovee had good news for Ryan: The collection agency that had the account, Midland Funding, had recently made changes to their credit reporting policy. Because the account had been delinquent more than two years prior, if he resolved it he could get it removed from his credit reports and continue looking for a home to buy.

Collection Accounts Can Damage Your Credit for Years

One of the most frustrating things about collection accounts is that once they are on your credit reports, the damage is done. You can resolve them — settle them or pay in full — but they still can remain on your credit reports for many years, affecting your credit scores and flagging you as a higher risk to lenders. (You can see how much collection accounts are harming your credit by reviewing two of your credit scores for free on Credit.com. The scores are updated every 14 days.)

It can be a long time before you completely put them behind you. By law, collection accounts may be reported for seven years, plus 180 days from the date you first fell behind with the original creditor. So if you stopped paying a department store card in January 2015, for example, and it later wound up in collections, that collection account could be reported until June 2022. Ouch!

While the newest credit scoring models — FICO 9 and the latest version of VantageScore — ignore collection accounts with a zero balance when calculating credit scores, most lenders are using older credit scoring models that treat all collection accounts as negative, whether they are paid or not. That means consumers trying to get a mortgage, car loan, credit card, or auto insurance may wind up paying more because of a collection account that perhaps was resolved some time ago.

Worse, most consumers seem to believe that paying a collection account will help improve their credit scores and are often shocked to learn after that fact that it doesn’t.

So when Encore Capital, which owns Midland Funding, Asset Acceptance and Atlantic Credit and Finance, quietly changed its credit reporting policy late last year, consumers who were the beneficiary of this new, more lenient policy may not have realized how fortunate they were to have these items removed from their credit reports, sometimes years before they would have been previously.

Specifically, these companies announced they would:

  • Stop reporting accounts that were more than two years old if the account was paid in full or paid for less than the full balance, and
  • Not report new accounts if payments are made within three months of the initial notice and are made on time thereafter until the account is paid in full or paid for less than the full balance.

According to one source familiar with this action, over 1 million of these derogatory accounts have already been removed from credit reports as a result of this change. There are at least 30 million Americans with accounts in collection, according to the FTC, but some estimates put that number as high as 77 million.

Changes on the Consumer’s Side

Bovee has been encouraging the industry to adopt new reporting policies for some time. “If the newer (credit scores) say paid collections don’t really matter, then keeping them on there is just punitive,” he says.

It’s not just consumers that can be hit by collection accounts. According to a National Federation of Independent Businesses survey in 2012, nearly half of small business owners use their personal credit in some way, shape or form to finance their company, so entrepreneurs with collections on their credit reports may struggle to get credit when their business needs it because of a mistake years prior. (You can check your business credit reports for collection accounts that may be hurting your business credit scores.)

Last year, Rep. Maxine Waters (D-Calif.) proposed a bill that would have reduced the time negative information stays on credit reports to four years and required that paid and settled debts be removed from credit reports within 45 days. However, that legislation stalled in Congress. (You can read more here about how to repair credit report issues and possibly improve your credit.)

Credit reporting is a voluntary system and no lender is required to report. But generally credit reporting agencies (and even some regulators) frown on removing accurate information early, as it may increase risk to lenders who are unaware of the consumer’s full credit history. So far, the change in collection account reporting by these major debt collectors hasn’t been met with public opposition from the bureaus.

Ryan appreciates this change. He knows that not all collection accounts are removed so quickly. “It’s very good to find out this will come off completely,” he says, “and makes you feel as if paying it off is well worth it.”

Bovee believes that other collection agencies are likely to follow suit in the not-too-distant future. After all, they want to get paid, and if consumers know that resolving their collection accounts will help get them removed faster, they are more likely to try to strike a deal.

“The cat’s out of the bag, and it needs to stay that way,” he says.

Image: PeopleImages

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Man Returns Library Book After 49 Years & Escapes the Fines

A former University of Dayton student returned an overdue library book earlier this year. In and of itself, that’s nothing newsworthy. What makes this library return special is that he first checked out the book 49 years ago.

James Phillips, who now lives in Minnesota according to the university, mailed the “History of the Crusades” to the university’s Roesch Library along with a note reading:

“Please accept my apologies for the absence of the enclosed book History of the Crusades. I apparently checked it out when I was a freshman student and somehow it got misplaced all these years.”

Phillips reportedly told the university he borrowed the book in 1967, but left school and joined the U.S. Marines.

The library, coincidentally, had no record of the missing book, the university reported, and plans to put the book back into circulation. University spokeswoman Cilla Shindell said the university has no plans to charge Phillips a fine. The university did, however, calculate what the fine would be when posting the story on its website. Using the 1967 fine rate of 2 cents per day, it would come out to $350.

Libraries don’t report directly to credit reporting agencies. However, some libraries will turn over unpaid balances to collection agencies, which in turn may report those balances to the major credit bureaus.

A collection account can lower your credit score by 25, 50 or even 100 points or more when it shows up on your credit report. Even worse, it can remain on your credit report for up to seven years plus 180 days from the date the bill was due to the original creditor, which means it can affect your credit scores for years to come. (You can get a free credit report summary every month on Credit.com to see the major factors impacting your scores.)

More on Credit Reports & Credit Scores:

Image: Fuse

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I Want to Pay an Overdue Bill. Where Do I Begin?

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Missing a bill payment can have all sorts of nasty consequences — late fees, debt collector calls and credit score damage, to name a few. No one wants to deal with any of that, and the sooner you address the debt, the sooner you’re likely to get rid of those problems.

But paying an overdue bill or debt collector can be intimidating, not to mention confusing. Here’s how to get a handle on the situation so you can make good on your obligations.

1. Figure Out What You’re Dealing With

Perhaps you got some mail or a phone call informing you that you’re behind on a bill. Before you start paying people, do a little research.

“We see consumers mistakenly come to the conclusion that they haven’t paid when they have,” said Randy Padawer, consumer education specialist for Credit.com partner, Lexington Law firm. “First, gather up all of the relevant paperwork and make sure that that is indeed the case.”

Check your account status by reviewing statements, and compare that with the information on your credit report. Know that a delinquent account is different than a collection account, but either way, Padawer said, the best place to start is with the original creditor.

2. Take Control of Communication

Start by calling the customer service department of whatever company you owe, say you want to pay them and find out the process for doing that, Padawer said. Maintain detailed records of your communication and payments. If you have an active account with that company, making the payment should bring you back to current status, but if the debt has been sent to a third-party debt collector, things can be a little more complicated.

“There are situations when original creditors won’t accept payments after things have been charged off,” Padawer said, but if you can arrange to pay the original creditor, you may be able to more easily resolve the issues with any related debt collectors. “They should and often will pull back the alleged debt from the collection agencies. That allows the consumer then to more easily dispute those subsequent collections right off of the credit report.”

Getting the collection account off your credit report won’t erase the late payment marks from when you first fell behind, but those will have less of an impact on your credit score over time.

3. Know Your Rights

Consumers have a lot of control when dealing with a debt collector. Whenever you first receive communication from a collector, you’re entitled to have them confirm in writing that you owe the debt, that they own the debt and that they are licensed to collect in your state. You can also dictate the way they communicate with you, ideally in a way that allows you to keep good records.

Take your time to make sure you’re properly addressing the problem, Padawer said. Most credit scoring models weigh paid and unpaid collection accounts the same (medical debt is an exception in some credit scoring models), so rushing to pay the debt won’t likely help your scores. Familiarize yourself with your debt collection rights so you can confidently reach a solution.

“You’re going to want to find out if the collection agency is willing to settle,” Padawer said. “Consumers should remember that [debt collectors] buy these debts for pennies on the dollar and they’re happy to collect a fraction on what they buy, but the problem is they are in business to maximize the take, so you may have to drive a bargain.”

That negotiation could include asking the collector to remove the account from your credit reports after you pay (they may not do it, but you’re allowed to ask), as well as paying less than what they’re trying to collect, which sometimes includes added fees and interest.

“I would be deliberate and take your time when negotiating with a debt collector,” Padawer said. “Don’t be rushed, especially when you don’t recognize either the company or the balance. Be willing to hang up without a deal and be willing to again commit all of the communication to writing.”

4. Make the Payment

Once you’re ready to pay, whether it’s with an active account or a debt collector, document your payment as well as you can. Write the account number on the check you use for payment, and save payment receipts. If you’re paying the original creditor, send proof of payment to debt collectors as part of your effort to remove those accounts from your credit reports.

“At the end of the day, if you have an obligation sent out for collections, fair or not, you’ve got your work cut out for you,” Padawer said. “It can be frustrating, but because credit reports and credit scores impact so much in a consumer’s life, you really owe it to yourself to handle these things with knowledge and strength.”

As you deal with resolving late payments and collection accounts, keep track of how they’re affecting your credit. You can see the impact of overdue accounts by checking your credit scores for free on Credit.com.

More on Credit Reports & Credit Scores:

Image: BrianAJackson

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