Anyone interested in making any large purchases or taking out a substantial loan should be well-versed with the contents of their credit report. 

The higher an individual’s credit score the lower interest rates will be, with larger limits for the new loan or credit card. There are many factors that go into calculating a credit score with some things being helpful and others being detrimental. 

One of the most severe marks that could hurt a credit score is when a collection account is placed on someone’s credit report.

How Are Credit Scores Calculated?

Before we dive into collections accounts and how exactly to remove them, first we must lay out exactly how credit reports work

A credit score is calculated by evaluating the data in an individual’s credit file in order to determine how likely an individual is to pay back their outstanding debts. 

Here are the five main types of information found in a credit report:

  1. Payment History: Arguably the most important aspect of a credit report. This shows whether a borrower has paid their credit accounts in a timely manner or if they’ve ever fallen behind or defaulted. This is where collection accounts would show up if they were created.
  2. Amount Owed: The second most important category of a credit report. This is the total amount of debt owed by an individual along with an evaluation of how much of a person’s revolving credit is being used each month. Revolving credit is an open-ended credit account like a credit card that can be used and paid down repeatedly as opposed to a loan that is either open or closed.
  3. Credit History Length: This part of the credit report focuses on how long the individual has had credit accounts open. Generally, longer and more established credit history translates to a lower risk and higher credit score.
  4. Recent Activity: The number of credit inquiries that an individual has or basically how many times a person has applied for credit in the past 24 months.
  5. Credit Mix: This is based on how many different types of credit accounts open, including mortgages, credit cards, auto loans, student loans, installment loans, etc.

What Are Collection Accounts?

Now that we have covered the basics of what make up a credit report we can look into collection accounts and how they affect a credit score. 

A collection account is whenever an individual falls behind on loan or debt payments and the money lender transfers the account to a collection agency or sells it to a debt buyer. 

Normally this happens a few months after the account becomes delinquent. Typically, the lenders and creditors will attempt to reach the individual regarding before utilizing the last option of selling the debt. 

Once the lender sells the debt to a collection agency, the business between the lender and borrower is concluded and the loan now belongs to the collection agency and they will be the ones interacting with the borrower from that point on.

How Long Will They Stay On A Report?

A credit report has a history of all the accounts opened by an individual and the subsequent payments to those accounts. 

The bright side is that positive information can stay for many years on a credit report, so good habits and payments can go a long way to helping a credit score for many years. 

The downside is that collection accounts will stay on a credit report for up to seven years. Even worse, these collection accounts can stay on a credit report even after they’ve been paid off and the balance is zero dollars. 

This is why it’s very important to avoid a collection account being placed on a credit report at all costs.

How Can A Collection Account Be Removed?

Now that we’ve covered how credit reports work and what collection accounts are we can get to how they can be removed from a credit report. 

Even if a collection account is paid off and the balance is brought down to zero, it will still show up on a credit report for seven years and can do substantial damage to a credit score. 

However, not all hope is lost as there are several different methods for potentially removing a collection account from a credit report.

A Goodwill Deletion from the Collection Agency

This option requires the borrower to write out a “goodwill letter” and mail it in to the collection agency that owns the debt. Basically a kind of plea for assistance. 

This letter should include the situation that put the borrower so far into debt in the first place and why it’s so important for the collection account to be removed. Provide any evidence that payments to the collection agency have been made on time and for how long and ask for the collection account to be removed out of goodwill. 

A little bit of a long shot, but it is a possible option.

Dispute Inaccuracies in the Collection Account

This option should follow a goodwill letter should it happen to fail and the collection account remains on the credit report. 

The first step in this option would be to procure a detailed copy of the credit report in question. Search and find the negative item that’s desired to be removed and investigate it closely, comparing it to each report from each of the three credit bureaus (TransUnion, Experian, and Equifax). 

Compare and confirm all the details and if literally anything is inaccurate or different from one to the other then make a note of it. The Fair Credit Reporting Act is very clear in requiring that credit reporting agencies only show accurate information in an individual’s credit history. 

If anything is incorrect then the credit bureau would have to fix the information and if it’s not possible to fix the errors then the negative item would be stricken and removed from the credit report. 

Some key points of information to look for while searching for inaccuracies would be:

  1. Account Balance
  2. Account Number
  3. Date Opened and Date Closed (any dates involved with the item)
  4. Status of The Account (open, closed, pending, etc)
  5. Status of The Payment (collection, closed, etc)
  6. History of Payment
  7. Date of Delinquency
  8. Credit Limit

Debt Validation

If there are no inaccuracies found in the negative item on the credit report then the next step would be to write to the collection agency and ask for them to validate the debt. 

Section 809 of The Fair Debt Collections Practices Act states that collection agencies are required to validate and confirm the debts they are trying to collect in the event that a borrower requests them to do so. 

This option does come with a time limit though. For only 30 days after the collection agency first contacts the borrower will they be able to request a debt validation. Should the collection agency fail to validate the debt then it should be removed from the credit report.

Pay-to-Delete Negotiation 

When a loan or past due balance is sold from a creditor to the collection agency the borrower would then owe the collection agency and not the original creditor. 

When the creditor sells this debt it is never for the full amount, and is very often for pennies on the dollar. This is beneficial to the borrower because if the debt is paid off in full, then the collection agency can make a huge profit, however any amount of money they receive that’s more than what they paid for the debt would also be a profit. 

For example, if a debt is $10,000 and it is sold to a collection agency and they pay $1,000 (10%) then anything they collect from the borrower that’s more than $1,000 would be profit. In this case, a borrower could call the collection agency and offer to pay $2,500 (25%) of the debt which would save the borrower money and still give the collection agency a profit. 

Agreeing to pay this amount for an account deletion would only work in the event of getting the agreement in writing, as a verbal agreement would not hold up.

The Takeaway: Avoid collections accounts at all costs, but if you end up with one, try to work with the collector to find a resolution as friendly to your credit score as possible.

At the end of the day, trying to remove a collection account from a borrower’s credit report can be a long uphill battle, but it is possible for anyone willing to try. 

There are numerous resources and tools available to anyone with the goal of getting their finances straightened out. Ultimately, whether or not a person is successful, the good news is that after seven years the collection account will be removed on it’s own. 

While that can be a long time to deal with the hit to a borrower’s credit score it’s not a permanent life long problem so as far as a worst case scenario it could be much worse.

Sources:

https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/

https://www.equifax.com/personal/education/credit/score/collection-accounts/