Saturday, July 31, 2010

Collections On Your Credit Report

Collections on your credit report can trip you up financially and decimate your credit rating. Unfortunately, collection agencies are notorious for making illegal false reports to the credit bureaus. Review your credit report regularly to make sure you aren't the victim of any of these dirty tricks:

Reporting Incorrect Dates

Collections on a credit report that reflect incorrect dates are by far one of the most common credit reporting errors most debtors will ever encounter. If you have a collection account on file with the credit bureaus, its more likely to reflect incorrect dates than correct dates. Here's why:

They know the correct dates. Do you?

You're more likely to pay a collection account if it appears on your credit report. Not only do some lenders require borrowers to pay off any outstanding debts they carry before being approved for a loan (think, mortgage), but the vast majority of unsuspecting consumers just assume that, as soon as they pay off the debt, the collection account will vanish from their credit report. Wrong. Wrong. Wrong. 

Per federal law, collections on your credit report can only remain there for 7 1/2 years after the day you stopped paying the original creditor. Original creditors usually don't sell debts to collection agencies until they're six months delinquent. Once the collection agency gets hold of the debt, it must give you 30 days to dispute the debt's validity. Thus, most collection accounts will only stay on your credit report for a total of 6 years and 11 months. 

The Fair Credit Reporting Act requires all business that participate in credit reporting to report the correct dates on all accounts. These dates are what instruct the credit bureaus' automated systems to remove the tradelines after the appropriate time period. The longer a collection account stays on your credit report, the more likely you are to make a big purchase with a lender that requires you to pay it off before lending to you. Thus, some collection agencies alter the dates on their reports to ensure that the collection account taints your credit file indefinitely. 

Reporting Your Collection Account As an Installment Account

No one knows the credit scoring formula FICO uses, although we do know the weight certain aspects of a credit report carry in the credit scoring formula. The types of debt you carry account for 10% of your credit score. The types of accounts that can appear on your credit report are as follows:

1. Revolving Accounts – credit cards, department store cards, HELOCs

2. Installment Accounts – mortgages, student loans, auto loans

3. Adverse Accounts – Reserved for collection accounts

Public records show up too, but that's a lesson for another day. Anyway, these three types of accounts make up that 10%, but like any credit repair specialist with enough experience will tell you, they don't all factor in equally

Collections reporting as installment accounts may hurt you even worse.

We have no way of knowing the exact formula, true, all any of us have to go on is experimentation and experience, but installment accounts appear to carry a greater weight when determining a credit score than revolving accounts do. Miss your credit card payment? ouch. Miss your mortgage payment? Bigger ouch. You get the picture. 

So, some collection agencies like to stick their reports into the "installment accounts" section of your credit report along with the section reserved expressly for old debts. Not only is double-reporting a big no no, but this all but guarantees that any lender you apply for a loan with will see the debt, since lenders place a considerable emphasis on your past history managing installment debts. When the lender sees the debt, guess who's going to have to pay it off before getting the loan? 

Not Updating Paid Collections

If you had collections on your credit report previously and paid them off, the accounts should reflect a status of "paid". ("Settled" if you paid less than the full balance). Although this does NOT in any way influence your credit score, it does impact the way creditors, insurance companies and employers who pull your credit reports view you. Having a collection account on your credit report is bad, but having one that's paid at least demonstrates that you're somewhat responsible (although I still strongly recommend not paying most collection accounts).

Lenders may not know your collection account was paid.

Of course, after the company gets the money, they have little incentive to correctly update your credit reports. Sure, the FCRA entitles you to a fair and accurate credit report, but getting a collection agency to acknowledge that is like trying to teach algebra to your child: It'll get through eventually, but its one hell of a headache until it does. The simple truth of the matter is that the collection agency doesn't care anymore what happens to you or your credit. The truly dastardly ones will then sell the debt, in its entirety, to a junk debt buyer after you've paid it in full. 

The bottom line is this: If you have collections on your credit report, check them carefully as they may very well contain intentional credit reporting errors designed to force you into paying an old debt. 

1 comment:

  1. What if a collection agency has falsely reported the accounts dates. I have proof that the account in question was open and charged off in 2006 however the agency is reporting the accounted opend in 2011. Can I have it removed because of false reporting ?