Consumers are notably concerned about the effects of collections on their credit rating. The FCRA protects consumers from inaccurate reports on their credit and also provides a way to dispute false information. When a consumer is educated on debt collections and its effect on credit reporting, they are more likely to pay on time. From a creditor's standpoint, reporting delinquent accounts to credit bureaus doesn't only impact consumer credit but can also affect the collections process.
Credit bureau reporting can actually initiate a call or prompt a payment from customer. Here's how.
When Creditors Report Early
A frequent question for businesses is when (how early) to report delinquent accounts to collection agencies or credit bureaus. Some accounts might not be worth the collections effort if they're really old debts; it may be better to settle for something rather than nothing. The earlier an account is sent to collections, the more likely it will be recovered and at a higher amount.
As an example, if a business reports a delinquent account early, it could actually prompt a payment from a customer. When the account is sent to collections, the customer will be alerted that a new collection account has shown up on their credit report. In many cases, this notice will initiate inbound calls from consumers who monitor their credit.
When Consumers Want Credit
When a customer is attempting to get new credit, for a credit card, mortgage or car loan, they will typically be made aware of collection accounts on their report. In the case of accounts in collections, lenders may deny credit or offer credit at a substantially higher interest rate. If the individual applying for credit is made aware of a better rate or an offer of credit once collections accounts are cleared up, they may initiate a call to a creditor or be prompted to negotiate payments. Lenders will want to see these collection accounts cleared up before they extend credit.
On the flip side, some debts reported to credit bureaus get discounted when factoring consumer creditworthiness. An example is medical debt. Since so many Americans have medical debt, lenders may overlook or discount these accounts.
When Reviewing an Annual Credit Report
Many creditors will offer the option or send a reminder to their account holders to review their credit report annually. Some consumers may be unaware they they have the option to receive one free credit report per year. Even if the debtor isn't monitoring credit alerts or applying for new credit, often the simple reminder that they can review their credit, for free, will motivate them to take a closer look at their report. A credit score or credit report will afford a moment to dive deeper into past-due accounts and again, could initiate an inbound call to collections to clear up an account.
Partnering with a collections agency can be a valuable resource for recovering delinquent accounts. When these accounts are reported to the credit bureaus, the account holder could be prompted into action. Consider reporting accounts early for a better success rate and a higher recovery amount.