Can a Collection Agency Report Bad Credit?

Your credit report contains personal information and both positive and negative account information. This data is reported to the credit bureaus by the creditor or other owner of the debt, such as a collection agency. It's important to understand under what circumstances the law allows a collection agency to report bad debts to the credit bureaus.

The Law

• Under the Fair Credit Reporting Act , negative accounts can appear on your credit report for up to seven years. These accounts can be reported by the original creditor as well as a collection agency that is hired to collect on the debt or to whom the debt is sold. In this case, the same account may appear twice on your report -- once under "Accounts" from the creditor and once under "Collections" by the collection agency. After the seven years, the bureau will remove both accounts from the report.

Significance

• Your FICO credit score is based upon the information contained in your credit report. According to MyFico, 35 percent of your score reflects how you pay your bills. Late payments and accounts that are charged-off by the creditor will lower your score. If the creditor places an account with a collection agency, once that negative account appears on your report, it will drop your score even further. How much of a drop you experience depends upon the other items on the report.

Prevention/Solution

• You do have rights when it comes to debt collection. Under the Fair Debt Collection Practices Act, a debt collector must prove that you owe the debt in question and that the amount of the debt is accurate. Once a collector contacts you by phone, within five days the collection agency must send you an initial collection notice, called a validation notice. You then have up to 30 days from receiving the initial collection notice to send the agency a debt validation letter that requests proof of that debt. During this time window, the agency cannot report the debt to the credit bureaus.

Considerations

• Under debt validation, the agency must submit to you proof of the debt, which could be in the form of bills from the original creditor, signed credit card receipts or the original contract. Until the agency can provide these items, it is prohibited from contacting you again unless to notify you of legal action. Also, if the agency cannot validate the debt, it is prohibited under the FCRA from submitting that account to the credit bureau until the debt can be validated. Under the FCRA, only accurate and valid information may appear on a credit report.

Warning

• According to Forbes, some debt collectors purchase "zombie debt." Zombie debt refers to debt that is beyond the statue of limitations in your state. Once a debt ages beyond the statue of limitations, you are no longer legally responsible for it, even if the debt is valid. A collection agency may pay pennies on the dollar for the old debt, then try to seek payment from you. The collection agency is also allowed to file suit on the zombie debt. If you appear and inform the court that the debt is expired, the judge will dismiss the suit; however, if you fail to appear in court, the court will issue a default judgment against you. You now are legally responsible for the debt and the collection agency can garnish your wages or bank accounts or seek other methods to collect. Never ignore a collection notice or a court summons.