Saturday, May 24, 2014

Why a Pay-for-Delete Doesn't Always Work for Credit Card Charge-Offs

For people under severe financial stress, credit card payments are near the bottom of their list of priorities.
It's all too easy for those who've never experienced being broke to point fingers and call these individuals
irresponsible. In reality, your first responsibility is keeping a roof over your head and taking care of your family. Sure, paying your credit cards late does some damage to your credit scores, but your basic necessities should always take precedence over your credit card payments.

That being said, if you leave your credit card bills unpaid for 180 days, the credit card company will charge off your debt. That doesn't mean you don't still owe the unpaid balance--you do. It simply means the company plans to claim your account as a tax loss.

After the Charge-Off

Credit card companies sometimes sell charge offs to third-party collection agencies. In most cases, however, they simply turn the debt over to an in-house collection department. In-house collections are owned by the credit card company itself. They'll often have different names to make them appear to be third-party collection agencies (for some reason credit card companies think this creates a greater sense of urgency to the consumer) but your debt generally doesn't change hands immediately following a charge off.

Credit Reporting Regulations Make a Pay-for-Delete Unlikely

Now, here's where things get tricky. When you owe a debt to a collection agency you can sometimes negotiate a pay for delete agreement. A pay-for-delete agreement is exactly what it sounds like: you pay the debt, the collector deletes the tradeline from your credit report. Although this practices is becoming less and less common, it still occasionally occurs. Your odds of successfully negotiating a pay-for-delete agreement with a credit card company, however, are slim to none. Here's why.

Federal laws governing credit reporting, namely the Fair Credit Reporting Act, require credit card companies and other information providers to report accurate information. Federal law alone isn't the only thing
Don't get frustrated over the lack of a pay-for-delete
deterring your creditor from tweaking your credit history in exchange for payment.

When any company signs up to become part of each credit bureau's reporting program, they have to agree to follow the company's rules. This means the credit card provider has to report accurate information to the best of its knowledge. Factual reports--even if they're negative--ensure that the credit bureaus can calculate the most accurate credit scores possible. Accurate credit scores help other creditors make the most educated risk-based decisions they can.

The Economic Fallout of Frequent Pay-for-Delete Agreements

A charge-off on your credit report indicates that, for whatever reason, you did not adhere to the terms of the agreement you originally signed up for. This makes you a bigger risk for future creditors. If the credit card company agreed to a pay-for-delete, your credit report would no longer reflect the added risk that you present.

If a credit card company agreed to do this for one person, or ten people, or even 100 people, it probably wouldn't make that much difference. If every credit card company allowed consumers to negotiate a pay-for-delete after a charge off, however, this would have a huge negative impact on the lending industry as a whole. While you may be a responsible person whose charge-off was the result of circumstances beyond your control, there are plenty of people out there who are just irresponsible schmucks. Lenders would suffer significant losses as a result of not having fair warning of these debtors' tarnished track records (Then again, banks seem to be quite adept at making messes all on their own, as we've seen in recent years....)

The end result, of course, is that the lending industry would begin to lose faith in FICO scores as an accurate risk-assessment tool. Consumers who'd worked hard to maintain high credit ratings would lose their access to premium rates because banks couldn't discern whether an applicant's credit scores were accurate or whether they were falsely inflated due to negative entries that were paid off and deleted.

No Credit Reporting? No Credit Building 

In addition, credit card companies are always on the hunt for new customers. They are particularly fond of college-age applicants. The idea is that if the credit card provider can convince a college student to apply for a card, they'll build brand loyalty with that individual and he/she is likely to keep the account open and use it. College students are also primary targets because they're at an age where they need to begin building good credit. If a credit card company loses its right to report consumer debts to the credit bureaus, it will also lose many potential customers who need a credit card in order to build credit.

It never hurts to ask, but don't be too alarmed if your credit card company denies your request for a pay-for-delete for a charge off. If you don't pay the charge off, however, the creditor will eventually sell it to a third party debt collector. When that occurs, the collection agency will add its own tradeline to your credit report and your credit scores will fall even further. Because of this, is a good idea to pay the charge off as soon as possible. Doing so doesn't improve your credit (paid negative items hurt your scores just as much as unpaid ones), but it does keep your credit scores from getting worse--and paid negatives do look better to lenders when they review your entire credit history rather than just your FICO scores.


  1. When pay for delete is not available a settlement option may be to agree to the creditor not responding to your challenge of accuracy with the credit bureaus for an entry on your reports. If there is no response within 60 days it has to be removed under the Fair Credit Reporting Act.

    1. I'm not sure what this commenter is trying to say, but I *think* he means that you could include deletion as one of the terms of a settlement negotiation. Keep in mind, however, that the dispute period is 30-days if you're disputing based on a credit report you purchased from the credit bureaus and 45 days if you're disputing with a free credit report.

  2. Lee, I made the comment you're replying to. I'm not talking about deletion as terms of the settlement agreement if the creditor says they can't do that. What I'm referring to is they do not respond to an investigation request, this is not the same as requesting verification. When an error is spotted on your credit report, the alleged debtor can dispute it with the creditor and credit bureaus. If the creditor does not respond to the dispute by law it has to come off your report. There's more detail here, including section 623 of the FCRA. Any settlement offers should consider the debt alleged only.