Editorial Policy

Once in collections, debt takes years to erase

Erica Sandberg

June 28, 2016

Q Hi Erica,

In 2014, I did not pay my credit card, and a collection agency got my account. Four months  ago, the collection agency started calling me all the time, so I decided to try to pay my bill. I talked to the collection agency representative on the phone, and was told that if I pay $465 on the first of every month my credit would get better. I just pulled my credit reports, and the full amount of my credit card debt is there — $2,322. I called the collection agency representative, and he said that erasing my debt as I pay was not the arrangement. What can I do now? — Luis

A Dear Luis,

Collection agencies and credit card issuers work a little differently when it comes to sending information to the credit reporting agencies.

Credit card issuers, like all lenders, regularly notify the credit reporting agencies (TransUnion, Equifax and Experian) of activity every month or so. Therefore, if your debt is a couple of hundred dollars one month and you paid it off the following month, the zero balance would be noted.

However, a collection agency is not a lender. For this reason, collection agencies do not furnish the credit reporting bureaus with an updated account of installment payments. You either have an outstanding balance or you’ve erased it. When the debt is paid, the collector should notify the credit reporting agencies that you owe nothing.

The latest versions of the major credit scores — FICO and VantageScore — ignore repaid collection agency debts. This means that after you make your final payment, your credit scores should increase.

Note that the evidence that the account went into collections will remain on your credit reports for quite some time. As per the Fair Credit Reporting Act, negative information such as this will remain listed for a full seven years. A creditor, business or anybody else entitled to check your credit reports will see that the original creditor sent the account to a collection agency because of nonpayment.

Before you start to get worried again, I assure you that a satisfied financial obligation looks much better than one that is still outstanding, and the older the notation that the account went to collection becomes the less relevant it will be. When that notation disappears from your credit report at the seven-year mark, no one will be the wiser.

I would like to commend you, Luis. You did the right thing by contacting the collection agency and dealing with this debt. It can be intimidating to communicate with a collection agency. And setting up a payment schedule that makes sense for you and the collection agency is not always easy to do.

What is important now is that you fulfill the terms of the plan. The collection agency now knows that you have the intent to pay, so if you stop sending the money, they may come after you for the remaining balance. This can lead to a lawsuit, and you definitely do not want that happen.

Review your budget carefully. Make sure you have enough cash left over after subtracting expenses from income to send your payments to the collection agency as promised.

In the meantime, if you still have a credit card, use it responsibly so you can add more positive data to your credit reports. Eventually what you’re doing now will overshadow what preceded it.

By paying your credit card bills on time and in full every month, you will be guaranteeing that your credit reports will be filled with the type of information that translates into a high credit score. And your responsible credit behavior also may help ensure that you will never have another debt to pay to a collection agency.

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