NO. 5 IN A SERIES: Your credit report’s collections section
In this issue of The Score, we conclude a five-part exploration of the portions of consumer credit reports that have a direct bearing on your credit score, and the relationship between the information they contain and your score. You can (and definitely should) obtain free credit reports once every twelve months at AnnualCreditReport.com.
Reports from the three major credit reporting companies—Equifax, Experian and TransUnion—are formatted differently, but each group’s information in similar sections: personal information, accounts activity, public records, and credit inquiries. Although it’s crucial to ensure your personal information is accurate, this series will disregard that issue, as it has no bearing on credit scores. Instead, we’ll consider the other four sections. This installment considers the section that lists collections information. Parts One and Two of the series examined the account activities section of the report. Part Three looked at the public records section, and Part Four looked at the section on credit inquiries.
Earlier installments in this series examined credit-report listings on inquiries, accounts, and public records, and how credit-scoring models treat those entries when calculating your credit score. As the grand finale of the series, we’ll tackle the section of the credit report that lists third-party collection accounts. Although collections have no redeeming value to your credit score, the news about them isn’t all bad.
First off, what is a third-party collection account? A collection account is an entry in your credit file reported to the national credit reporting companies (CRCs)—Equifax, Experian and TransUnion—by a collection agency or a debt collector who is attempting to recover a debt on behalf of another creditor. So, for example, if you default on your electric bill, the power company might enlist a debt collector to try to convince you to pay your obligations. That collector might in turn report your debt to the CRCs, leading to its appearance on your credit report in the form of a collection account.
There are also scenarios whereby a debt buyer purchases a defaulted obligation from the original creditor, in effect becoming a new creditor. Such a creditor may also report the debt to the CRCs, which also causes it to appear as a collection account on your credit report.
In either case, the name of the creditor listed in connection with a collection account may or may not make it clear to whom you originally owed the delinquent payment. In our example, for instance, a collection entry on your credit report may not give any indication that the debt in question concerns your electric bill. If you don’t understand the basis for a collection entry on your credit report, contact the reporting party using the supplied information, and ask for an explanation.
A collection entry is a blemish on any credit report. It cannot and does not have any redeeming value, which means it never causes your credit score to be higher. The best that can be said for a collection entry is that it does not always have a negative impact on your credit score. Very often, however, a collection account causes your credit score to be lower than you’d like. Whenever possible, therefore, it’s best to get it removed from your credit report as quickly as possible by clearing up the debt.
Credit scoring systems include the presence of collection accounts in their credit-score calculations because collections are predictive of elevated credit risk. Consumers with third-party collection accounts in their credit files are statistically likelier to miss future debt payments than consumers without collections in their files. And under the current iteration of the Fair Credit Reporting Act, collections can remain on your credit reports for up to seven years from the date the original account went into default.
There is, however, some good news regarding collections. First off, the newest version of the VantageScore credit scoring model, VantageScore 3.0, ignores collections that have a zero balance. (This is not because those accounts are no longer predictive; it’s just that the design of the model uses a combination of other factors that are collectively even more predictive.) The net effect: Consumers who pay or settle their collections can see immediate, meaningful increases in their VantageScore 3.0 credit scores.
In addition, the national CRCs recently announced revised procedures for reporting medical collections, which also could lead to improvements in consumer credit scores: By June 8, 2018, collection agencies will not be able to report medical collections to the credit bureaus until they have gone at least 180 days delinquent. This is designed to provide additional time for handling of insurance claims, and to prevent payments that are in process from appearing as collections on credit reports. Also, by June 2018, any medical collection that is paid or being paid by an insurance company will have to be removed from consumer credit reports. That will no doubt bring meaningful increases to some consumers’ credit scores.