If a borrower is unable to fulfill their payment obligations to a credit account, such as a loan or credit card, to the point that they become extremely delinquent on the said account, the lender may sell the account to a collection agency.
Once a credit account is sold off to a collection agency, they can begin reporting that account to the credit reporting agencies- Experian, Equifax, and TransUnion. Much like “regular” creditors and lenders, the collection agency gains the right to both report the account and begin collection efforts once they become the legal owner of the debt.
Once reported, both the original credit account- from the original lender- and the new account- under the collection agency- will appear on your credit report. But why are two accounts being reported on my credit report? And would it help if I pay off the collection account? In this article, we will answer just that.
Why Two Accounts Are Being Reported
You may be wondering why both the original account and the collection account are being reported on your credit report. Well, since your credit report is a historical record of your credit accounts and payments, the original account, even if it's written off as a loss by the lender, will remain part of your history for seven years from the original delinquency date, much like any other delinquencies.
Once the credit account is sold to a collection agency, you no longer owe the original creditor, but instead, owe the collection agency that the debt was sold to. Usually, The original account will appear on the credit report as a charge off, and will show as either closed or transferred to another company.
The collection account will appear separately on your credit report as an open and outstanding debt. The open date of the new collection account will reflect the date that the account was purchased by the collection agency, but it will still be removed seven years after the original date of delinquency- on the initial account.
Will Paying Off The Collection Account Help?
The answer to this question depends on the credit scoring model used to calculate your credit score. There are many credit scoring models lenders may use, and depending on which one, the paid collection account may or may not be considered in the calculation.
Newer credit scoring models ignore collection accounts that have been paid off or have a zero balance. This is true for both the most recent version of FICO credit scores(FICO 9), and the two newest versions of the VantageScore(3.0 and 4.0). Meaning. If a lender chooses to use one of these newer credit scoring models to get your credit score, a paid-off collection account will not work against you and your credit.
However, since older scoring models consider collection accounts- whether they are paid off or not- in credit score calculations, the scores generated by these older models will still reflect the delinquency.
This is extremely important because some lenders, especially mortgage lenders, use older versions of the credit scoring models. Which means, despite you settling or paying your debt to the collection agency, you may not get the result you desire. While it is a good idea to pay off your collection accounts, you should ask your lender what credit scoring model they use- so that you understand how it may impact your credit scores.
Can You Get Collections Removed?
While the Fair Credit Reporting Act(FCRA) allows collections to be reported for up to seven years, debt collectors, collection agencies, or a credit reporting agency are under no obligation to remove a collection simply because it has been paid off.
Do understand, however, if you believe you have a collection account on your credit report that is inaccurate, you have the right to get the item removed or corrected with the credit bureau where the collection account is being reported.
Fortunately, however, collection accounts on your credit report count less and less toward your credit scores as time moves forward. And while collection accounts cannot be removed, as mentioned before, newer credit scoring models ignore them- as long as the account is paid.
The Bottom Line
Most negative credit information, including collection accounts, will and must eventually be removed from your credit reports, under the FCRA. However, even if they do fall off over time, It is still in your best interest to settle your debts as quickly as possible. Remember, newer credit scoring models ignore zero-balance collections, but older scoring models do not.
Additionally, if you believe you have a collection account on your credit report that is inaccurate, you have the right to get that information disputed. Get in touch with us and we will make sure that no errors in credit reporting will hurt your credit scores. Call us at 888-799-7267 to schedule a Free Credit Consultation.
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