A Chicago-area debt collector threatened to sue and garnish the wages of consumers in violation of federal law, the Consumer Financial Protection Bureau said in a consent order. The CFPB alleged that Asset Recovery Associates of Lombard, Ill., also threatened … Continue reading →
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Collections are one of the worst things to have on your credit report. They can damage your credit score significantly for a long time—up to seven years. This helpful guide explains what collections are, how they affect your credit, how collection agencies try to re-age debt, how to get collections removed from your credit report, and more.
What Is a Collection Account?
A collection account is a debt account that has been sold by the original creditor to a third-party debt collection agency. This happens you (the borrower) are delinquent on payments long enough (generally 180 days) for the lender to charge off the loan, which means they consider the account to be a loss—but that doesn’t mean you’re off the hook.
Once the account has been charged off, the original creditor closes your account and often transfers or sells it to a debt collection agency or a debt buyer. (Debt buyers typically focus on purchasing debt accounts and they hire debt collection companies to attempt to collect the debt.)
When Does the 7 Year Credit Rule Start on Your Credit Report?
Regardless of who the debt was transferred to or when it was transferred, the Fair Credit Reporting Act (FCRA) allows collections to legally be reported by the credit bureaus for up to seven years after the date of the first delinquency (also known as “DOFD” for “date of first delinquency”).
The seven-year rule for collections begins on the date of first delinquency.
What does this mean exactly? How do you figure out the date of the original delinquency of an account?
According to Experian, the date of the original delinquency is the first reported late payment. As an example, if you have a 30-day late reported and never catch up on payments, then the delinquency would later get reported as a 60-day late and eventually as a 90-day late.
The seven-year period after which the delinquency falls off begins with the first missed payment, the 30-day late. If the debt is sold to a collection agency, the original account and the collection account will both be removed from your credit report seven years after the initial delinquency, says Experian.
Medical collections are slightly different in that a 180-day grace period must be provided to allow insurance benefits to be applied. Therefore, the seven-year timeline starts after 180 days, not after a 30-day late.
The date that a collection account is charged off or transferred to another company does not change the DOFD and therefore should not change the date that the delinquency falls off of your credit report.
How Often Do Collection Agencies Report to Credit Bureaus?
Collections agencies can begin reporting to the credit bureaus as soon as they acquire your account. After that, they will typically report to the credit bureaus every month, like most other types of tradelines on your credit report. Therefore, if you have a collection account, you will most likely see the collection agency reporting every month.
Should You Pay the Debt Collector or the Original Creditor?
If you already have an account in collections, meaning the original creditor has already closed your account and transferred it to another owner, you should not pay the lender that the loan was originally from. The debt now belongs to someone else, so it would be pointless to pay the original creditor.
How Do Collections Affect Your Credit Score?
Having one or more collection accounts on your credit report can quickly lead to bad credit. A collection account on your credit report means you failed to make sufficient payments on a debt, which is a big red flag to lenders that you might default on a loan again. Therefore, your credit score will likely suffer a significant drop if you have an account go to collections.
Collections are major derogatories, so they can lead to bad credit. afeCredit.com, CC 2.0.
However, collections with low balances may not impact your score at all, depending on which credit scoring model is being used to calculate your score, such as VantageScore or a FICO credit score.
FICO scores 8 and 9 ignore both paid and unpaid collections that had an original balance of less than $100.
FICO 9, VantageScore 3.0, and VantageScore 4.0 don’t count paid collection accounts against you and treat medical collections as less important than other types of collection accounts.
Unfortunately, with FICO 8 and previous versions of FICO, which most lenders today still use, all collections are highly damaging to your credit score, regardless of what type of account they are or whether the collections have been paid or not.
Does Paying Off Collections Improve Your Credit Score?
Unfortunately, paying off a collection won’t necessarily improve your credit score right away. Why?
As we said, with all FICO scores except FICO 9 (which is not widely used yet), both paid and unpaid collections are considered to be major derogatories on your credit report. Since a paid collection is still a major derogatory mark, paying off your collection likely won’t help your credit score if the scoring model used is FICO 8 or earlier.
On the other hand, since FICO 9, VantageScore 3.0, and VantageScore 4.0 ignore paid collection accounts, your score should rebound after paying off a collection with these credit scoring models.
Can a Collection Agency Change the Open Date of a Collection?
The open date of a collection is the date that the collection account was acquired by a debt collector. Every time the debt changes hands, the new collection account will thus have a new open date.
The open date does not affect how long the collection remains on your credit report because it’s the date of first delinquency (DOFD) that determines when the collection will be removed from your credit. While each debt collector will have a different open date, the DOFD cannot be changed unless it was reported incorrectly.
Can a Collection Agency Report an Old Debt as New?
You may have heard of another date pertaining to collection accounts: the “date of last activity” (DLA).
You might have heard it said that you should never make payments on a collection because that action would change the DLA on the account. If the DLA changes, so the advice goes, this “resets the clock” on the seven-year period after which the collection will fall off your credit.
In reality, debt collectors cannot change the DLA—only the credit bureaus can do that. Furthermore, the DLA does not affect the timeline of your collection account.
As we know, the seven-year period begins at the DOFD, not the DLA, and not the open date of the collection. The collection agencies are not legally allowed to change the DOFD, so there should be no legitimate way for them to “restart” the seven-year timeline. Yet there are many cases in which consumers report that their collection accounts are suddenly being updated as new accounts, even if they are several years old. What is going on in these situations?
This shady practice is the collection agency re-aging the debt.
It’s illegal to re-age a collection account by incorrectly changing the DOFD.
When a debt collector acquires an account, they sometimes improperly update the DOFD to be the same as the date opened. If you make a payment on the collection, they may replace the DOFD with the DLA, which is the date that you made the payment. This explains why the seven-year clock seems to restart in these situations.
But guess what? Re-aging a collection is illegal. Collection agencies cannot legally report an old debt as a new collection.
If a collection agency keeps updating your credit report with incorrect information and the date of first activity or the date opened on your credit report is wrong, you have the right to dispute that account and have it updated or removed from your credit report.
Double Jeopardy Credit Report
A “double jeopardy” credit report is when you have multiple collections for the same account on your credit report. This can happen when the debt is being reported by both the original creditor and the collection agency on your credit report or when the debt is sold to another collection agency.
Experian explains why there may legitimately be duplicate accounts on your credit report:
“When an account is charged off, or written off as a loss, it remains on your credit report for seven years from the original delinquency date leading up to the charge off.
Often, the original creditor will transfer or sell the account to a collection agency. In that case, the original account will be updated to show transferred/closed, and will no longer show a balance owed because the debt is now owed to the collection agency. However, your report will still show the history of the account, including the amount that was written off.
Since you now owe the collection agency, it will report the current balance owed.”
In this case, having multiple accounts for the same collection on your credit report is normal and should not change the impact the collection has on your credit score.
A true case of double jeopardy on your credit report involves duplicate collection accounts on your credit report being reported as open collections, which would be even more of a disaster for your credit than having a single open collection account.
Multiple Collection Agencies Same Debt
If your credit report looks as Experian describes, with the old collection accounts accurately reporting as closed, there may not be much you can do besides wait seven years for the collections to fall off your credit report.
However, if the original creditor and/or multiple collection agencies report the same debt as if they are all separate open collection accounts, that may be an error that you need to dispute with the credit bureaus.
How to Remove Collections From Credit Report
It may be possible to remove collections from your credit report depending on the situation.
How to Dispute a Collection on Your Credit Report
If a collection on your credit report is inaccurate or a duplicate collection account, you can dispute the collection account on your credit report. This doesn’t necessarily guarantee that the collection will be removed from your credit report, though, because the account could be updated with the correct information rather than removed.
The Federal Trade Commission provides a guide to disputing errors on credit reports as well as a sample FCRA dispute letter. Alternatively, some consumers may prefer to hire a credit repair service to assist with disputing inaccurate information.
How to Remove Paid Collection Accounts From Credit Report: Pay for Delete Collections
Even once you have paid a collection, you may find that it is difficult or impossible to remove it from your credit file. However, if you do want to try to remove zero balance collections from your credit report, one method that consumers use to do this is the “pay for delete” strategy.
You may be able to negotiate a “pay for delete” agreement with the debt collector.
With the pay for delete method, you negotiate with the debt collector to have them stop reporting the collection to the credit bureaus in exchange for your payment, whether you negotiate to pay the full amount owed or settle the debt for a lesser amount.
It may not be necessary to hire a pay for delete service, since you can look for a sample pay for delete letter online, although a credit repair service might be helpful in this situation as well.
Keep in mind that debt collectors are not obligated to accept the offer outlined in your deletion letter, so this strategy is not a guaranteed success.
If the collection agency does agree to delete the collection once you pay it off, it’s best to get verification of this agreement in writing before you make any payments.
Does Pay for Delete Increase Credit Score?
Remember that FICO 9, VantageScore 3.0, and VantageScore 4.0 don’t penalize paid collections, so it may not be a problem to have a paid collection on your credit report if your lender uses one of these credit scores. In this case, the deleted collection won’t increase your credit score.
However, with FICO 8 and earlier FICO scores, paid collections do hurt your credit, so a successful “pay for delete” arrangement could lead to a credit score increase after collection removal.
On the other hand, you may be shocked to learn that it is possible that deleting a collection could actually make your credit score go down. This is because there are certain scorecards or “buckets” within each credit scoring model that categorize consumers based on what is in their credit file and calculate their score differently depending on what bucket they are in.
As a hypothetical example, let’s say you have one collection on your file and you get that collection deleted. Perhaps you used to be in a scorecard of consumers with one or more major derogatories on file and after the deletion, you get reassigned to a different scorecard in which the consumers have no major derogatories. Since you are now in a higher bucket, your credit score would be calculated differently, and your score could actually decrease compared to what it was when you were in the lower bucket.
How to Remove Collections Without Paying
The only legitimate way to get an unpaid collection removed from your credit report is if the collection is more than seven years old or if it is being reported incorrectly.
If the collection is older than seven years, it should have been removed from your credit report already, so you can dispute that account with the credit bureaus to have it removed.
If the account is being reported inaccurately, such as if the date of first delinquency or the date opened on your credit report is wrong, you can also dispute the account and have it updated or removed as described above.
Conclusions on Collections
If you have a collection account on your credit file, you might end up with bad credit for a while, but it’s not the end of the world. Collections must be removed from your credit file after seven years whether they were paid or not, and the damage to your credit score will lessen as the collection ages.
Some credit scoring models don’t count paid collections against you, so you might see a credit score increase after paying off a collection. Alternatively, you could try to negotiate a pay for delete agreement with the debt collector.
If you have an old or inaccurate collection on your credit report, you can dispute this with the credit bureaus and have it corrected or removed.
Finally, the best thing to do to help your credit recover after a collection is to focus on building credit and maintaining a positive credit history going forward.
Read more: tradelinesupply.com
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Since 2010, financial institutions are required to get your permission for overdraft protection, a service that you would opt in to receive. If you’ve opted in, you will be charged overdraft fees if you exceed your account balance.
Many banks and credit unions offer overdraft programs, and these can vary by institution.
It might seem like overdraft fees are a problem of the past: in the old days, people mostly wrote paper checks that would take some time to clear, and if money got withdrawn in the meantime, there would be insufficient funds for the check, triggering an overdraft fee.
Now, with the new laws regarding overdraft fees, the speed with which banks process payments, and the spread of electronic payments instead of paper checks, it would seem that overdrafts would be less common.
It’s not true, though. There are more reasons than ever for overdrafts to happen. People have more online subscriptions than ever. They use online bill pay, where the money is scheduled to come out of their account at a later date. And some people still write old-fashioned paper checks. On top of that, some purchases won’t go through as fast as we expect. If you order something online and it’s not in stock, the merchant might process your payment days or weeks later when the item becomes available again. That timing might not be good for your budget, and trigger overdraft fees when the delayed purchase goes through.
How to avoid overdraft fees
The first thing to do is opt out of overdraft protection. This is the default setting for bank accounts by law, but if you’ve opted in to overdraft protection, you need to change that. If you’re not opted in, then one-time transactions will be declined if there aren’t sufficient funds, so you won’t be charged overdraft fees.
Yes, it’s inconvenient and potentially embarrassing to be told at the register that your transaction was declined, but overdraft fees can severely hurt your finances—that $5 latte can become a $40 cup of coffee when overdraft fees are applied.
Notice we said one-time transactions are declined. Banks may still process your payment if you have recurring automatic deductions, online bill pay, or other regular payments deducted from your account. This means you will still have plenty of opportunities to trigger overdraft fees even if you haven’t opted in.
Use your bank’s bill pay. It’s better to set up bill pay from your bank’s side, rather than direct debit—with the latter, you authorize your biller to withdraw the funds required straight from your account. It’s convenient for you, but puts you at greater risk of overdrafts, since you aren’t involved in the bill payment process. By using your bank’s online bill pay instead, you still have to log in and authorize the payments, so you know how much money is available and there are no surprises.
Beware of temporary holds. If you buy gas at the pump, your debit card will typically be charged a pre-set amount that might be greater than the real purchase. You might only want to get $10 worth of gas, but a gas station might put a hold on your funds that could be 10 times that amount. We’ve seen reports of gas station holds of $125 or more, just to make sure you have enough funds to pay for your fill-up. Tip: One way to prevent this is to avoid using debit at a gas pump, and go directly into the store and prepay for the exact amount of gas that you want. Eventually, that money is released back into your account, but while it’s being held, you could have much less available than you think, putting you at risk of overdrafts. Another place temporary holds are common is at restaurants, where a default amount is added for a tip, and then the real tip you authorize is calculated later. If the default hold is higher than the actual tip, you risk coming up short.
Use your financial institution’s app. Keep track of your balance all the time. Use your bank’s web site or app so you always have a quick way to check your balance. While you’re at it, sign up for alerts, so you’ll get a text message if your balance drops below a certain amount. Many people don’t like to think about their bank balances, especially when they get too low, but it’s critical to your budget and financial well-being to be aware of what’s in the bank at all times. This will also help you spot things like fraudulent charges quickly so you can get them resolved before they do too much damage.
Link your savings account to your checking so that if you are overdrawn, money is automatically transferred from one account to the other. This might not be free, but a transfer of this nature will be much less than an overdraft fee. Think $10 for the transfer vs. a $35 overdraft fee.
Use prepaid cards. If you continue to have problems with overdrafts on your account, you could set up a prepaid card, so that there’s no way you can spend more than is available.
Get budgeting/debt counseling. Any NFCC-member credit counselor can help you create a budget you can live with. If you have a lot of credit card debt, they can set up a debt management program or self-administered plan that will teach you to live on a cash basis while paying off that debt. This budgeting help is worth seeking out if you’re in any danger of overdraft fees.
Melinda Opperman is Senior Vice President of Community Outreach & Industry Relations, Springboard Nonprofit Consumer Credit Management, Inc; and Executive Director, Springboard Education Foundation. Springboard Nonprofit Consumer Credit Management is a member of the National Foundation for Credit Counseling.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.
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The average credit score of borrowers who refinanced mortgages in July with loans backed by Fannie Mae and Freddie Mac rose to a six-year high, according to an Ellie Mae report. The score was 750, up from 742 in June. … Continue reading →
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College is expensive – no secret there. How expensive? That all depends on the school’s tuition rate, the price of room and board, and the cost of texts and other essentials. If you’re considering a 4-year private intuition can expect to pay around $50,900. Thinking of a public intuition? If it’s in your state, you can expect to pay around $25,290. If it’s out of state, the cost jumps to $40,940 according to LendEDU college cost statistics.
How will you pay for it? If you’re like nearly 70% of today’s students, you’ll need to rely on student loans to some extent if not fully. That may mean filling out the Free Application for Student Aid (FAFSA) and applying for federal student loans. In some cases, it may mean turning to private lenders for a private student loan. In fact, you may even find that you need to do both.
Both federal loans and private loans can help cover tuition, especially in such a costly market. Despite being counterparts, qualifying for a private loan differs considerably compared to a federal loan. Whereas federal options require the FAFSA and the intent to go to school, private student loans require applicants to bring more to the table.
If you find you’re in a pinch to cover tuition, then it pays to know what a private student loan application requires in terms of credit, eligibility, and more.
Must Have at Least a Good Credit Score
Private lenders use a credit score to help determine eligibility, and it influences rates and terms for private student loans. Contrarily, the U.S. Department of Education doesn’t typically base eligibility for federal student loans on credit history — Parent PLUS loans are an exception.
If you have a good score and track record managing debt, then you will typically have better access to private student loan products. A better credit score can increase the likelihood of receiving better rates and terms. Broadly speaking, most lenders require borrowers to have scores in the high 600s, but many prefer higher credit scores in the 700s or 800s. A low score can influence a dropped application, and it can also lead to higher rates and limited terms on an accepted application.
If you’re considering a private loan, it’s important to check your credit score. Things like late payments, defaulted accounts, a high debt-to-income ratio, or revolving debt totals that exceed 30% of your available credit can all bring your score down. To keep your score healthy, make it a point to pay bills on time and keep your debt in check as a general rule of thumb.
Need to Meet Income Requirements
Another important factor that lenders consider is the borrower’s income. This can be particularly frustrating to new students who may not have the time or skill set to earn a substantial income. After all, access to higher paying jobs is often a leading reason to go to college in the first place, but your future income may not help you take out a loan today depending on the lender.
That’s not to say that you’re out of luck until you graduate. If you’re making an income, even from a part-time job, it may still be able to help on an application. Many lenders look at your income as it relates to your debt. A low debt-to-income ratio can help you secure lower rates. A higher ratio will make it more difficult to be approved and if you are, your rates will likely be higher. At any rate, this can be an especially prohibitive criterion, so you may want to consider applying with a cosigner if this were the case.
Enrollment in a Qualified Education Program
As the name suggests, student loans are explicitly for students. Typically, lenders require that borrowers are enrolled at least half-time in an eligible 4-year or 2-year program or a trade school. In some instances, a lender may not approve loans for community college or non-4-year programs, so it’s best to contact a lender directly to determine if your academic plans meet their eligibility requirements.
It’s also important to note that you must intend to use the funds for academic expenses. To ensure this, some lenders will disburse the funds directly to the school.
Other General Requirements
In addition to the requirements above, private student loan lenders frequently limit eligibility to applicant’s who are 18 years or older and have a high school diploma or GED. Lenders also typically have citizenship rules that require a borrower be a U.S. citizen, though there are some lenders specialize in student loans for non-citizens.
A Cosigner May Be Required
Though not an outright requirement, you may need to add a co-signer to your application if you don’t meet the lender’s credit score or income requirements. There are several pros and cons to cosigning a student loan. A qualified co-signer can be the difference between approval and denial; they may also potentially help you secure better rates.
If you do need a co-signer, they must meet the lender’s eligibility requirements, including credit score and income requirements. In short, a co-signer would need to have high income and a great credit score in order to help significantly.
If your co-signer is lacking in either category, then they may not add the needed security to an application compared to applying for student loans without a cosigner. Furthermore, keep in mind that your co-signer’s credit will also be on the hook for your debt, which he or she should be aware of.
When Should You Consider a Private Loan Over a Federal Loan?
If you’re a new student, don’t have good credit, or have low income, then a federal loan may be your best option. For many borrowers, federal student loans have lower guaranteed rates and offer more protections and benefits, like public service loan forgiveness or income-driven repayment plans. They do not require applicants to have great credit or established income as opposed to private loans.
However, if you or a willing co-signer have good/excellent credit, then you may find that a private student loan is worth considering. Lenders may offer creditworthy borrowers lower rates than federal loans. Just keep in mind that you may need to pay private loans back while in school, and you won’t be able to take advantage of federal loan benefits such as forgiveness.
If you need to finance all or part of your education, it’s important to understand the primary differences between federal and private student loans and their respective requirements. Doing so can help you identify the best option for your current needs and save you money in the long run.
Andrew is a Content Associate for LendEDU – a website that helps consumers, college grads, small business owners, and more with their finances. When he’s not working, you can find Andrew hiking or hanging with his cats Colby & Tobi.
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Last Wednesday, President Donald Trump issued an executive order intended to wipe out the student loans of around 25,000 permanently disabled veterans, a move that came after dozens of state attorneys general said that it was way too complicated for … Continue reading →
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