Yes. When a debt is sent to collection, your credit score will take a hit. For this reason, there are several mandatory steps that debt collectors must take before they can report consumer debts to credit reporting agencies.
Two federal laws – the Fair Credit Reporting Act and the Fair Debt Collection Practices Act (FDCPA) – protect you from unscrupulous debt reporting. Additionally, the Consumer Financial Protection Bureau’s (CFPB) Debt Collection Rule clarifies aspects of the FDCPA. For instance, it requires debt collectors to discuss the debt with you in person or on the phone. Alternatively, they may communicate in writing, via a mailed letter of electronic communication.
Collections on Your Credit Report. What Now?
Even people with the best of intentions fall behind in their payments. After all, most Americans are a single paycheck or a major hospitalization away from financial crisis. When debts accrue and debt collectors come calling, your credit can take a big hit. Understanding the following four things can help you keep an eye on your credit and avoid the worst consequences should one of your debts get sent to collections:
- How credit scores are calculated.
- What your credit report includes.
- Cleaning up your credit report.
- How the law protects you.
How are credit scores calculated?
When most people think of credit scores, they have FICO scores, which measure consumer credit risk, in mind. According to FICO, their scoring incorporates five types of information. Payment history accounts for 35% of your score, the amount you owe makes up 30%, the length of your credit history counts for 15% of your score, and the mix of credit types and the amount of new credit you have each add 10% to your credit score.
Credit scores are dynamic and can change from month to month. All five types of information used to formulate your credit score are found on your credit report. The three major credit reporting bureaus are Experian, Equifax, and TransUnion. Each of them produces a credit report.
What’s in my credit report?
Your credit report contains a variety of information about you and your financial status:
- Personal data.
- Trade lines.
- Credit inquiries.
- Debt collection.
The first bucket of information contains your personal data, such as your birthdate, social security number, current and former addresses, and employment history. The next section contains what are called “trade lines.” Each trade line consists of a credit account. For example, your credit report might have trade lines for Visa cards, department store credit cards, car loans, student loans, and your mortgage.
The next section of information pertains to credit inquiries. This is a list of every company that has looked at your credit report over a certain period of time – typically two years. For example, if you apply for a credit card and the company checks your credit, this will show up as a voluntary credit inquiry. On the other hand, if a company checks your credit because they want to send you an unsolicited offer of credit, that shows up as an involuntary credit inquiry.
Finally, the last section of your credit report contains information on overdue debt from debt collection agencies. It also includes information about a bankruptcy you may have filed or judgments entered against you as a result of civil lawsuits.
How do I see my credit report?
Thanks to the Fair Credit Reporting Act, consumers are entitled to a free copy of their report from each of the three major credit bureaus once every 12 months. You can get your free reports by visiting https://www.annualcreditreport.com
What do I do about collections in my credit report?
Depending on the circumstances of the debt, you can take one of several steps:
Dispute the debt. Under the Fair Debt Collection Practices Act (FDCPA), when you notify a debt collection agency that you are disputing a debt, they are required to notify the credit bureaus that the debt is being disputed. If the collection agency fails to do so, they are in violation of 15 U.S.C. 1692(e)(8).
The CFPB’s Debt Collection Rule that came into effect on November 30, 2021 requires debt collectors to provide information about debts and consumer rights in a written validation notice. This includes information about how to dispute a debt. The validation notice must also include a tear-off form that you can send back to the debt collector if you are disputing the debt.
Report inaccuracies. If there is inaccurate information about collections in your credit report, notify the consumer reporting agency (Equifax, Experian, or TransUnion). Under the Fair Credit Reporting Act (FCRA), inaccurate, incomplete, or unverifiable information must be removed or corrected. If they fail to do so, it’s a violation of 15 U.S.C. 1681i(a).
Push back on threats. If a debt collector threatens to report a debt to a credit bureau that they know is not your responsibility to pay, then that is also a violation of the FDCPA, namely 15 U.S.C. 1692(e)(8).
Settle the debt. If you are in a position to negotiate a debt settlement, require the debt collection agency to delete the item from your credit report as part of the settlement.
Watch for time-barred debt. Once debts are deemed uncollectible, they are often sold in batches for pennies on the dollar to debt buyers. Often, these debts are past the statute of limitations and are legally unenforceable. Nevertheless, some debt buyers attempt to collect on the debt and may report it to credit bureaus in violation of the FCRA.
Statute of limitations laws vary between states. Once the time period has lapsed, it becomes a time-barred debt.
Make sure old collections are gone. The FCRA – specifically 15 U.S.C. 1681c(a)(4) – says that accounts placed into collections must be dropped when they’re seven years old. Contact the credit reporting agencies if old accounts are still on your credit report.
How Does the Law Protect Me?
As mentioned above, the FDCPA’s Debt Collection Rule specifies action that debt collectors must take before they report any debt to a credit reporting company or credit bureau. This is to prevent debt collectors from reporting debts and then waiting for consumers to contact them when they discover negative credit reporting.
The Debt Collection Rule, which became effective on 30 November 2021, states that debt collectors must take one of the following steps:
- Discuss the debt with you in person
- Call you and discuss the debt telephonically
- Mail you a letter about the debt and wait a reasonable length of time (generally 14 days) to allow for a notice that the letter wasn’t delivered
- Send you an electronic communication about the debt and wait a reasonable amount of time (as above), in case the message isn’t delivered
If a debt collector sends you a validation notice about your debt, it generally means they have satisfied the legal requirement to contact you. If so, they can begin the process of reporting your debt to credit reporting companies.
Vigilance is worth it
Being vigilant about your credit report is worth it. Credit dictates everything from how much you pay in interest rates to whether you’re able to rent an apartment, and even whether or not you get a promotion. Holding debt collectors accountable can ensure that they won’t represent hurdles as you rebuild your credit and find your financial footing.
If a debt collection agency or a credit reporting bureau has violated the law, you are entitled to sue them in state and federal court. You may be entitled to statutory damages of up to $1,000 for violations of the FDCPA and FCRA, along with court costs and attorney fees.
Lemberg Law has a team devoted to representing people who have been harassed, threatened, deceived, or abused by debt collectors. Call and set up a free consultation at 844-685-9200 or submit the online request form.
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