What is a receiving account?
When a borrower doesn’t pay back a debt for several months, the creditor or borrower may transfer the account to a third-party collection agency or sell it to a debt buyer. The collection agency will then pursue the borrower for all or part of the debt under the Fair Debt Collection Practices Act (FDCPA) — federal guidelines designed to protect consumers from “abusive, deceptive and unfair debt collection practices.”
If you’re on time with your payments, this shouldn’t happen to you. But if it does happen, be aware that debts are usually not referred to collections for at least 30 days after the delinquency begins, and usually only after the creditor or lender has made multiple attempts to contact you directly by mail or phone.
Once the account is transferred to a collection account, a new collection account will appear on your credit report. At the same time, the overdue payment will be recorded as a negative item in your credit account information.
Medical debt collections are an exception. In 2017, the three major credit bureaus began waiting 180 days after a medical debt is collected by a collection agency before it will negatively impact your credit score. Starting July 1, 2022, credit bureaus must wait a full year before reporting unpaid medical debt collections—paid medical collection debts will no longer appear on credit reports . 2 These changes are intended to address the long time it often takes to resolve insurance and billing issues.
How long do collection records stay on your credit report?
- Collection accounts can remain on your credit report for up to seven years from the date the original debt became delinquent. In other words, the clock doesn’t “reset” when a debt is referred to a collection agency.
- For example, if your last on-time payment was January 1, and your original creditor sends your debt to a collection agency 90 days later, the clock will start ticking from January – not April.
- Even if you pay off the collection account before the seven-year period is up, it may still remain on your credit report. However, its impact on your credit score will likely decrease over time.
How to remove paid items from your credit report
It can be comforting to know that you’ve paid off a collection account. But unless the debt is a medical collection debt, it will still remain on your credit report, and will likely stay there for up to seven years. Unfortunately, while many sources may indicate that a “goodwill write-off” is possible, the credit bureaus cannot legally remove accurate or verifiable information. 3 All you can do is wait. The good news is that the longer the seven years, the less your payment history will be taken into account.
Dispute your credit report and remove inaccurate collection records
Mistakes are inevitable, so there is no reason for you to suffer any adverse consequences if a collection debt mistakenly appears on your credit report. If you see a collection account on your credit report and believe it is a mistake, the Fair Credit Reporting Act (FCRA) allows you to dispute the error . To do so, follow these steps:
- Review all your credit reports. Yes, all three. Check Experian, Equifax, and TransUnion to confirm the collection account is accurate and from which creditor.
- File a dispute with the credit bureau. Each credit bureau has an online dispute form that you can fill out to start the process . 5 You can also file a dispute by mail or over the phone. The credit bureau will usually review your claim within 30 days. If they agree with your claim, the credit bureau will send the information to the provider, and the provider must remove the error from your credit report.
- Dispute directly with the provider. You can also file a dispute directly with the company that provides information to the credit bureaus (also called a provider). The Consumer Financial Protection Bureau (CFPB) provides a template to help you file a dispute . 6 If the provider determines that the report is incorrect, they must remove it from your report or correct any incorrect information.
Will paying off your balance improve your credit score?
In short, it depends on the situation.
Credit scoring models like FICO 9, VantageScore 3.0, and VantageScore 4.0 ignore paid collection accounts, which means any paid account can improve your credit score. The problem, however, is that many lenders still use older credit models, like FICO 8, which count zero-balance collections as part of your payment history, thus negatively affecting your credit score even after they are paid off.
Still, paying off a collection account has the potential to improve a lender’s assessment of your creditworthiness, regardless of which credit scoring model the lender uses.
If you find a collection account on your credit report, make sure it is accurate. Credit reporting agencies provide ways to dispute a collection if you believe it is an error. If you do have a collection account, it is important to pay it off. Zero-balance collections can help restore your creditworthiness in the eyes of potential future lenders—and newer credit scoring models ignore collection accounts that have been paid off.
Michael Grace is a freelance personal finance and technology writer based in New York City.
All Credit Intel content is written by freelance writers and is commissioned and paid for by American Express.
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