Unpaid debts that end up held by collection departments or third-party collection agencies hurt your credit score because they indicate that you cannot be trusted to meet your financial obligations. If you cannot restore the original account's standing as "current," removing the collection notation from your credit report is the only way to remedy the damage it does to your credit score.
In-house Collections
When you stop making payments to a creditor, it forwards your account to its in-house collection department. Not all creditors have collection departments, but if yours does, the fact that your account is in collections will not appear on your credit report. The lack of a collection account on your credit report, however, does not mean that your credit score is not suffering. Missing payments to your creditors tarnishes your credit rating. The best way to fix an account held by an in-house collections department is by paying the account in full and bringing your account back into good standing with the creditor.
Collection Agencies
If you see a collection account on your credit report, you can rest assured that a third-party collection agency purchased your unpaid debt. The only way to fix a collection agency's report is by having the collection account deleted from your credit history. Sometimes collection agencies will voluntarily delete collection accounts if the debtor agrees to pay off the debt. Paying off the debt without first negotiating with the company to have it removed, however, will not positively affect your credit rating.
Reporting Period
Regardless of whether an in-house collection department or third-party agency owns your debt, the Fair Credit Reporting Act (FCRA) states that the debt cannot remain on your credit report for longer than seven years after you defaulted on the original account. If you discover a collection account in your credit history that exceeds the reporting period allowed by law, you can improve your credit score by reporting the obsolete account to the credit bureaus for removal.
Account Disputes
Collection accounts for debts you do not owe have no business on your credit report. Unfortunately, credit reporting errors are not uncommon. A 2004 study performed by the U.S. Public Interest Research Group found that 79 percent of consumer credit reports contain incorrect information. If the collection account on your credit report does not belong to you or you do not recognize it, dispute the account's presence on your credit record with the credit bureaus. A federal law provides the credit bureaus with 30 days to investigate and, if the creditor cannot validate the account, the credit bureaus delete it from your report---improving your credit score.
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