An estimated 220 million U.S. consumers have at least one credit report maintained by the major credit bureaus of Expedia, Equifax, and TransUnion. And of these millions of consumers, one out of three have what’s known as a “collections tradeline” included in their reports. Yet most Americans may not even know what a tradeline is, let alone be aware of how collections tradelines could be impacting their lives. But impact them they do.
That’s why it’s essential to understand what a tradeline is, how they get on your credit report, and what to do if you have a tradeline on yours.
Collections Tradeline
What is a “collections tradeline”? That’s the industry’s term for debts that have gone unpaid long enough that they are in collections—the original creditor, a third-party debt collector, or a debt purchaser are seeking repayment—and this collection appears on someone’s credit report. Credit agencies consider the presence of a collection tradeline on someone’s credit report as a red flag—an indication that the person won’t pay their debts. So the agencies downgrade their credit score accordingly.
One problem with collection reports is that few companies do report, but if they do, they usually did so at the time only when they began collections proceedings. For example, a debtor may have been successfully making a car payment for years, but their creditor never reported their loan and payment history. Then, the debtor falls behind with a small portion remaining on the loan when it goes into collection. But it’s only the collections that appear on the report.
Therefore, collections tradelines can give a distorted, overly negative view of a debtor’s credit history.
An Incorrect Collections Tradeline Can Harm Your Credit Score
According to a report by the Consumer Financial Protection Bureau (CFPB), if someone with a credit score of 680 has a collections tradeline for a debt of $100 or more, their score will drop at least 40 points. Ironically enough, a collections tradeline is even worse for someone with a higher credit rating. For those with a score of 780—a very good score—their score can drop more than 100 points. And a lower credit score may mean that creditors will charge you higher interest rates on loans. With a low enough score, they may even deny you a loan.
Significantly, a debt that has gone to collections can still appear on your credit report after paying the debt in full. And even a paid collections tradeline can reduce your credit score.
And all this hinges on the credit agencies’ assuming that a collections tradeline is always correct. But that turns out not to be true. Not by a long shot. . .
Read part 2 by clicking here!