You May Be Able to Get Collection Accounts Off Your Credit Report Sooner Than You Think

While shopping for a home to buy, Ryan discovered through his credit monitoring service that a collection account had hit his credit reports. His credit score dropped, and he was worried it could jeopardize this ability to get a mortgage. “I had no idea what it was,” he says. He wanted it off his credit.

After doing some research online, Ryan (he asked his last name not be used to protect his privacy) connected with Michael Bovee of Consumer Recovery Network, who helped him negotiate with the collection agency to resolve the account.

Bovee had good news for Ryan: The collection agency that had the account, Midland Funding, had recently made changes to their credit reporting policy. Because the account had been delinquent more than two years prior, if he resolved it he could get it removed from his credit reports and continue looking for a home to buy.

Collection Accounts Can Damage Your Credit for Years

One of the most frustrating things about collection accounts is that once they are on your credit reports, the damage is done. You can resolve them — settle them or pay in full — but they still can remain on your credit reports for many years, affecting your credit scores and flagging you as a higher risk to lenders. (You can see how much collection accounts are harming your credit by reviewing two of your credit scores for free on Credit.com. The scores are updated every 14 days.)

It can be a long time before you completely put them behind you. By law, collection accounts may be reported for seven years, plus 180 days from the date you first fell behind with the original creditor. So if you stopped paying a department store card in January 2015, for example, and it later wound up in collections, that collection account could be reported until June 2022. Ouch!

While the newest credit scoring models — FICO 9 and the latest version of VantageScore — ignore collection accounts with a zero balance when calculating credit scores, most lenders are using older credit scoring models that treat all collection accounts as negative, whether they are paid or not. That means consumers trying to get a mortgage, car loan, credit card, or auto insurance may wind up paying more because of a collection account that perhaps was resolved some time ago.

Worse, most consumers seem to believe that paying a collection account will help improve their credit scores and are often shocked to learn after that fact that it doesn’t.

So when Encore Capital, which owns Midland Funding, Asset Acceptance and Atlantic Credit and Finance, quietly changed its credit reporting policy late last year, consumers who were the beneficiary of this new, more lenient policy may not have realized how fortunate they were to have these items removed from their credit reports, sometimes years before they would have been previously.

Specifically, these companies announced they would:

Stop reporting accounts that were more than two years old if the account was paid in full or paid for less than the full balance, and
Not report new accounts if payments are made within three months of the initial notice and are made on time thereafter until the account is paid in full or paid for less than the full balance.

According to one source familiar with this action, over 1 million of these derogatory accounts have already been removed from credit reports as a result of this change. There are at least 30 million Americans with accounts in collection, according to the FTC, but some estimates put that number as high as 77 million.

Changes on the Consumer’s Side

Bovee has been encouraging the industry to adopt new reporting policies for some time. “If the newer (credit scores) say paid collections don’t really matter, then keeping them on there is just punitive,” he says.

It’s not just consumers that can be hit by collection accounts. According to a National Federation of Independent Businesses survey in 2012, nearly half of small business owners use their personal credit in some way, shape or form to finance their company, so entrepreneurs with collections on their credit reports may struggle to get credit when their business needs it because of a mistake years prior. (You can check your business credit reports for collection accounts that may be hurting your business credit scores.)

Last year, Rep. Maxine Waters (D-Calif.) proposed a bill that would have reduced the time negative information stays on credit reports to four years and required that paid and settled debts be removed from credit reports within 45 days. However, that legislation stalled in Congress. (You can read more here about how to repair credit report issues and possibly improve your credit.)

Credit reporting is a voluntary system and no lender is required to report. But generally credit reporting agencies (and even some regulators) frown on removing accurate information early, as it may increase risk to lenders who are unaware of the consumer’s full credit history. So far, the change in collection account reporting by these major debt collectors hasn’t been met with public opposition from the bureaus.

Ryan appreciates this change. He knows that not all collection accounts are removed so quickly. “It’s very good to find out this will come off completely,” he says, “and makes you feel as if paying it off is well worth it.”

Bovee believes that other collection agencies are likely to follow suit in the not-too-distant future. After all, they want to get paid, and if consumers know that resolving their collection accounts will help get them removed faster, they are more likely to try to strike a deal.

“The cat’s out of the bag, and it needs to stay that way,” he says.

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