At least for certain consumers whose collection agency has adopted a more lenient credit reporting policy, they’d see less of their collection accounts on their credit reports. Still, for the rest, there are years to count for the complete removal of one collection account. An account in collection is a ding to your credit score, a possible threat to your mortgage financing opportunities.
Collection Accounts and Your Credit
The impact a collection account has on your credit score is not to be missed. If you happen to have a delinquent account that gets marked for collection, this constitutes a negative information on your credit report.
When lenders see a debt in collection, it’s a red flag waving at them. They could be more probing of your credit history and while they could give you a loan, it may be at a less favorable rate.
Seven Days and 180 Days
Credit reporting is voluntary, says Yahoo Finance, but this does not stop negative information such as an unpaid collections bill from being reported. The concern is having this derogatory mark removed too soon could lead to lenders not being able to see the complete credit picture when making a decision.
Per the Fair Credit Reporting Act, “accounts placed for collection or charged to profit and loss” remains on your credit report for seven years. This seven-year period actually begins after the 180 days from the date the account became delinquent.
For example, you did not make any payment on your credit card in September 2011 and thereafter. Your lender then declared your account as charged off, meaning it has been closed but is owing, some eight months later. Your delinquency is September 2011 and this negative information will be on your credit report until February 2019.
The Older the Account, the Less Its Impact
Not all missed payments are created equal as the longer your account is past due, the bigger is its impact on your credit score. This impact, however, lessens over time as newer and better payment behavior is being reported.
Still, you would be better off paying off those debts even if they remain for years to come. Resolving these owing accounts is for your peace of mind especially if you are on the brink of being sued.
Some Progress
As reported by Yahoo Finance, debt collector Midland Funding has rolled out a policy that it will not report/will stop reporting certain collection accounts if (a) they are more than two years old and have been paid in full or less than the full balance; and (ii) new accounts where payments have been made three months after the initial notice and are current.
Moreover, FICO and VantageScore are implementing credit scoring models that will exclude certain accounts in collection from their calculations. For FICO 9, it will exclude accounts with less than $100 as the original balance. VantageScore 3.0 will not include accounts, paid or unpaid, with balances below $250.
There is also a bill that seeks to overhaul the credit reporting system to make it fairer, more accurate and less confusing for the public. If enacted, the time for collection accounts and other adverse information to remain on credit reports will be shortened to four years.
