Most consumers unfortunately do not realize the truth about collection accounts and how these accounts impact their credit scores. Collection accounts of any dollar amount (even $0) have the potential to cause severe credit score damage. The truth is that once a collection account worms its way onto a consumer's credit report then that account is probably going to have a negative impact upon the consumer's credit scores to at least some degree as long as the account is present. Furthermore, paying off a collection account usually will not have the impact of raising a consumer's credit scores.
Paid Collections Usually Remain on Credit Reports
When a consumer pays or settles a collection account the collection agency is responsible to notify the credit bureaus that the consumer's account balance should be updated to $0. (Note: collection agencies often drop the ball and do not update paid/settled collection accounts properly. When this occurs it is ultimately the consumer's responsibility to dispute the error with the credit bureaus. A consumer has the right to dispute inaccurate accounts on his own or with the help of a professional like HOPE4USA.)
If a collection agency and the credit bureaus are all following the Fair Credit Reporting Act properly (BIG if) then a $0 balance collection is actually allowed to remain on the consumer's credit reports. According to the Fair Credit Reporting Act, a collection account is legally allowed to remain on a credit report for 7 years from the date of default on the original account as long as the account is being reported accurately and it is verifiable. Paying or settling a collection account alone is not grounds to force it to be removed from a consumer's credit reports and, generally, paid collection accounts stay put.
Why Paid Collections Still Hurt Credit Scores
The FICO credit scoring models which are currently in use by the vast majority of lenders are built so that they do not care so much about the balance of a collection account as they care about the occurrence of a collection account in the first place. Therefore, paying or settling a collection account will generally do nothing to raise a consumer's credit scores (with the exception of paying/settling a credit card collection). FICO Score 9, announced in the summer of 2014, was built to ignore collection accounts with a $0 balance. However, lenders are not currently using FICO Score 9 and only time will tell whether or not the new scoring model will be adopted in the future. In the meantime, $0 balance collections will continue to have a negative impact upon a consumer's FICO credit scores.
The Pay for Delete Strategy
There is nothing in the Fair Credit Reporting Act which compels or requires a collection agency to report an account on a consumers credit reports. Credit reporting has always been a voluntary practice. As a result, it may be possible for a consumer to negotiate a "pay for delete" settlement with a collection agency.
A "pay for delete" settlement is essentially an agreement for a collection agency to remove an account from a consumer's credit reports once the account has been paid or settled as agreed. In order to properly negotiate a "pay for delete" agreement a consumer needs to be sure to take the following steps.
- Call the collection agency.
To begin a consumer should call the collection agency who has reported the account to his credit reports and offer to settle the account in question based upon the understanding that the account will be deleted from his credit reports once the settlement has been paid. - Get the offer in writing.
The harsh truth is that collection agents are not always known for being the most honest people on the planet. If a collection agent promises to delete an account after payment is received and does not follow through then the consumer will need the offer in writing in order to have any type of recourse. "He said, she said" simply is not going to cut it if a collection agency tries to renege after the fact. - Check credit reports after the fact.
The only way to truly know if a collection account has been deleted from a consumer's credit reports is for the consumer to check his credit reports after the collection agency has had time to update the account (i.e. around 30-60 days after payment). A consumer can also subscribe to a 3-bureau credit monitoring service, at least temporarily, so that he will be notified immediately when any changes take place on his credit reports. CLICK HERE to check out some great 3-bureau credit report and score monitoring services.
The Catch
While it is not illegal for a collection agency to delete a paid collection account (remember that credit reporting is completely voluntary), deleting paid collection accounts is something that the credit bureaus frown upon heavily. In fact, when a collection agency signs their service agreement with each of the credit bureaus - Equifax, Trans Union, and Experian - there is language in the agreements which warns collection agencies not to delete collection accounts simply because they have been paid. If a collection agency is caught violating the terms of their service agreements then they could lose their ability to report collection accounts to a consumer's credit reports - a crushing blow to any collection agency's bottom line and something that they want to avoid at all costs.
Negotiating a "pay for delete" settlement is a difficult, often downright impossible undertaking. However, that does not mean that consumers with collection accounts are without hope of improving their credit. CLICK HERE to download a free copy of the HOPE4USA Credit Repair Toolkit for help getting started on your journey toward better credit today!
Michelle Black is an 13+ year credit expert with HOPE4USA, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here.
