Aging Derogatory – Part 1: Aging Collections
If you have been following my blogs, then you’ll agree that the more recent the derogatory – the bigger the impact it has on the credit score. We’ve discussed what accounts can help your credit score when settling and which accounts can damage your score if settled. We also covered how collection agencies manipulate dates to cause the most damage to a credit score. It is imperative to learn how to properly age these accounts by identifying violations, settling accounts, or by targeting problem areas when re-establishing credit. A single derogatory entry can have several different dates represented on the credit report and depending on the type of derogatory will determine key dates. There is so much confusion and contradicting information floating around regarding this subject that my aim is to unravel the web of confusion and educate you on a very important piece of this puzzle through this blog.
If the age of the debt has the biggest impact on the credit score, how do we properly age the debt?
The first step to properly aging a derogatory is to know the difference between Collection Agencies and Original Creditors. On these accounts, the dates that impact the score are completely different from each other. So, with that said, let’s start off with collection agencies and how to recognize when they seem to be refreshing accounts. And of course, how to properly age these accounts.
Collection Agencies are a third-party entity, collecting on behalf of the original creditor or they have purchased the debt and now own it. The FCRA regulates how collection agencies can report on behalf of the Original Creditor. If original creditor is not reporting to the credit bureaus, then the contracted collection agency can report in lieu of. However, if the original creditor is reporting the debt then the collection agency cannot otherwise the debt would seem as it is being reported twice. This is a common violation. If the collection agency owns the debt, the original creditor can still be listed on the credit file but with the debt marked as sold and with a zero balance. The collection agency can then report the debt with an outstanding balance.
To properly age an account or recognize violations, you must know what each date represents and how it affects the credit score. Important dates to look for include the open date, date of last activity, and the date of last delinquency. Our focus will be on these three as they have the most effect on your score.
The Open date is the date the collection agency has taken on the debt. The open date is the most damaging to your score when aging a collection. A mountain of confusion surrounds this one detail as many people believe that the seven-year statute of limitations starts from this date. Unfortunately, it does not. However, it does refresh the account and will report it as if it were a newer debt thus causing more damage to your credit score. I know that you will read and hear information that contradicts what I’m telling you but please know that just because it does not technically re-age the debt, the credit score still calculates it as a newer debt. Remember, the newer the derogatory – the more damage it causes.
Collection agencies seem to revel in this loop hole and will continue to sell old debts to each other to create brand new open dates. Each time an agency buys the debt, they keep the consumer from being able to move forward and progress from the storms of their past. Many collection agencies are affiliated with each other and my guess is that they probably share the same ownership. Through this strategy of passing around debts, if the Attorney General were to fine or open a class action law suit against the entity, they could simply file bankruptcy and roll everything over to the next agency. Although this is manipulative and unethical, it is completely legal. It is like hitting the refresh button on an old debt.
Date of Last Activity (DLA) is the last activity reported on an account. This usually represents the last time a payment was made on an outstanding debt. However, it can also have a broader meaning, for example – it could simply be a conversation with the creditor they deemed as activity. The DLA can and will make a huge negative impact on the credit score.
Date of Last Delinquency is the last time the debt has gone delinquent. This is the date that the account would age from if accurately reported. Unfortunately, this date is often abused and its biggest violators tend to roll the date each month. When this happens, it tricks the score into reading the debt as if it were an original creditor with a payment plan showing the client as if they were currently late. This common practice keeps older debts fresh and each month will update the debt as a current delinquency. The three most common violators I’ve come across are Midland Funding, LVNV, and Portfolio.
You can’t seem to put the past behind you – despite on-time payments and optimizing your credit utilization, the debt keeps coming back to haunt you. It’s like that stain you can’t get out of the carpet no matter how desperately you try. Once you think you’ve got it – surprise! Its back a couple weeks later. Eventually you just give up trying to remove it. So, what should you do?
Give them your money? Nope, that’s not a good idea. In most cases, paying off a collection simply updates the date of last activity. Sure, the report says “PAID” but the credit score does not calculate the balance nor the word PAID. What it does calculate is the indicator code that represents it as a collection and a newer date of last activity (which was the date you paid it off), thus lowering the credit score.
You can use these violations as leverage to get the derogatory deleted. Methods we use to remove these accounts include disputing, proper debt validation, MOVs, and age verifications. We will cover those details in a later blog but until then let’s go over how to stop collection agencies from reselling the debt.
You can stop the reselling of collections and re-aging of open dates by recognizing and responding to a new collection agencies’ dunning notice. The law mandates that before a collection agency can begin collection activity (including reporting to the credit bureau) they must notify the debtor by letter to the last known address. If the debtor does not respond, the collection agency can begin collection after 30 days. Most collection letters come in various sizes, shapes, and colors but since the dunning notice is federally mandated one thing will always be the same. See the example below:
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request this office in writing within 30 days after receiving this notice this office will provide you with the name and address of the original creditor, if different from the current creditor.
If that paragraph is on the collection letter, it is more than likely a new collection agency picking up the debt. No matter if the debt is new or not, you must respond to it within 30 days! Ask them to validate the debt by requesting a list of items regarding the debt. Not only will this most likely kill their efforts to collect the debt, but legally that new collection agency cannot sell the debt if they did not validate it. Obviously, some still sell regardless but at least you will have records to fall back on in case they do. The design of the credit score was to assess and calculate the risk factor of a consumer’s credit with much weight placed on the date of the accounts, then factoring in hard times, and the consumer’s history. There is nothing accurate about the scoring system if the information that is being red is manipulated and inaccurate. I see this happen every day to hard-working, tax-paying consumers: They get back on their feet and become low risk and loan worthy, only to get stuck in a cycle of refreshed debt.
This is a big part of what we do at Credit Firm Inc. for our clients. We recognize the violations that occur (all too often!), and demand that the debts are reported correctly and consequently have them removed. We educate our clients so they can recognize a dunning notice and get it to us ASAP so that we may respond on their behalf. And we do this indefinitely – doesn’t matter if it’s three years down the road. You receive a dunning notice, get it to us. We’ll take care of it!
In Part 2 of this blog entry, I will go into detail about how to properly age an account with an original creditor; the damaging dates, factors, and violations regarding these accounts; and what accounts you should consider settling and when you should do so. Click HERE to read Part 2.