Credit reporting is a complex and highly regulated process, and there are a lot of myths and misconceptions floating around about what is and isn’t required. Credit reporting policies are also amended and updated from time to time, so what may have been true about the world of credit reporting a few years ago is not necessarily the same today.
Add to the complexity and ever changing nature of credit reporting the fact that there are many self-proclaimed “credit experts” who constantly feed the public an all-you-can-eat buffet of bad information about credit reporting and it is no surprise that the average consumer can feel very confused about the subject.
One common misconception that you may have believed regarding credit is the idea that credit reporting is mandatory. In other words, you may believe that creditors are required by law to report your accounts to the three credit reporting agencies (Equifax, TransUnion, and Experian). In reality, nothing could be further from the truth.
Fair Credit Reporting Act Requirements
The federal law that governs the credit reporting agencies and how these agencies manage your credit reports is known as the Fair Credit Reporting Act (FCRA).
The FCRA, which has been around since the early 1970s, is quite lengthy and covers a large variety of rules and regulations pertaining to credit reporting including how long different types of items are allowed to remain on your credit reports.
What the FCRA does not include, however, is a requirement for any creditor to report any item to the credit bureaus at any time. Credit reporting has always been completely voluntary.
Then Why Do Lenders Choose to Report?
While there is no requirement for lenders to report information to the credit reporting agencies, most lenders voluntarily choose to do so. Lenders depend heavily on credit reports and credit scores to help them predict the risk of doing business with new applicants (or even continuing to do business with their existing customers).
The more information credit reports contain, the more predictive and valuable they become. For this reason most lenders proactively choose to report account information regarding their customers to the credit reporting agencies and they benefit further when other companies follow suit.
A second reason many companies choose to report items to the credit reporting agencies is because it helps the companies to compel their customers to make payments according to the terms of their agreements.
For example, if a credit card company did not report your payment history to the credit bureaus every month then you might be more tempted to make your payments late. However, knowing that there are negative repercussions to your credit reports and scores if you make late payments provides great motivation to pay your bills in a timely fashion.
Why Debt Collectors Do Not Remove Paid Collections In A Voluntary System
You may be wondering why debt collectors do not remove their accounts from your credit reports once the debts have been paid or settled. Instead, even paid collection accounts typically remain on your credit reports as long as they are legally allowed to remain regardless of whether or not the debt is paid or outstanding.
The FCRA requires that collection accounts be removed from credit reports after 7 years from the date of default of the original account. Yet a collection agency or credit reporting agency could legally remove the account sooner if they desired to do so. Remember, credit reporting is voluntary.
Why then do these collections generally stay on credit reports even after being paid or settled?
The reason collection agencies do not simply delete paid or settled account has to do with the agreements these third party debt collectors sign with the credit reporting agencies. Collection agencies need the ability to report to the credit bureaus in order to help them compel consumers to pay their debts.
When the credit reporting agencies grant a debt collector the right to report accounts they must sign an agreement which details, among other things, the policies and procedures which the credit reporting agencies will require the debt collector to follow.
One of those policies states that a debt collector is not permitted to remove an accurate account from a consumer’s credit report simply because it has been paid or settled. As a result, paid collection accounts stay put on credit reports until the 7-year credit reporting clock has expired, albeit with a zero balance.