Collection accounts are derogatory credit report entries that have long been a part of the credit reporting landscape. They occur when a debtor defaults on some sort of obligation with a creditor, service provider or property manager. Collections are never fun to deal with because they can often lead to lower credit scores.
According to the Fair Credit Reporting Act (FCRA), collection accounts can be legally reported by the three national credit reporting companies (Equifax, Experian and TransUnion) for as long as seven years from the date of the original default. So, for example, if you defaulted on an apartment lease in June 2013, any subsequent collection account stemming from that default could remain on your credit reports until June 2020.
There’s a widespread misconception that collections accounts must be deleted from credit reports once they have been paid off in full. That is not true: If you pay or settle a collections account, the only obligation on the debt collector and the CRCs is to update the account to show it now has a zero balance. At the present time, there is no obligation for the debt collector or the CRCs to remove the collection account simply because it has been paid, settled and now has a zero balance.
The news, though, gets better from there. Some of the newest credit scoring models, including VantageScore 3.0, the latest version of the VantageScore credit model, ignore collection accounts with zero balances in the calculation of credit scores.
Keep in mind, however, that the collection is still displayed on the credit report. And despite the fact that it may not affect your credit score with some of the newer models, lenders could nonetheless consider it as a matter of policy. Further, older credit scoring models, such as those still widely used in mortgage lending, continue to consider collection accounts of all types, even those with zero balances.
Models that consider zero-balance collections accounts in score calculation typically treat the accounts as derogatory entries. Thus, they can still have an adverse impact on credit scores and can cause either credit declinations or approvals with less favorable terms. This underscores how important it is for lenders and others to convert to the newest versions of credit scoring systems because they’re more borrower-friendly in their treatment of collection accounts.