The story is all too common these days. Consumer applies for a credit card, consumer makes charges on said credit card, consumer stops paying said credit card. This is the beginning of a chronology of events destined to end badly for the cardholders. And while we all know that credit card issuers can report the performance of your accounts to the credit reporting agencies, did you know that collection agencies also have their own ‘credit report’ strategy?
Stuck nice and deep within the Fair Credit Reporting Act, the Federal law that mandates how your credit reports can be used, is section 604 entitled Permissible Purpose. A Permissible Purpose, in English, is a reason or condition that allows another party to pull your credit reports from the credit reporting agencies. And clearly listed within this paragraph is what gives collection agencies permission to pull your credit reports. Per this section the credit reporting agencies are fully allowed to provide a credit report to any company that intends to use the information in connection with the collection of an account.
So now that we know collection agencies are allowed to pull your credit reports, what exactly are they looking for? Are they buying your credit scores? And what kind of inquiry are they posting?
What are they looking for? – Simply put, they’re looking for you. Step one of any successful collection effort is to find the debtor. And what better to use to identify your current mailing address than your credit reports? This is commonly referred to as skip-tracing. In addition to your current address they are also trying to determine if you have the capacity to pay the collection account. If you owe them $1,000 and you have a credit card with a $10,000 credit limit, which will be on your credit reports, then you can afford to pay them. You might not want to, but you can.
Are They Buying Your Credit Scores? – You bet they are. In most cases credit scores are used to determine creditworthiness. But in the case of a collection agency they are using a different type of credit score designed to determine the likelihood of you making a payment. Think of it this way, if you took 100 people who owe you money and calculated their collection credit score you could focus your collection efforts on the people who score the highest and are most likely to pay you. And, maybe just as important, you could ignore the lowest scoring people, who are the least likely to pay you.
What Kind of Inquiry is a Collection Inquiry? – I have bad news for this one. Collection inquiries are hard inquiries and are seen by other creditors and credit scoring models. This means whenever a collection agency pulls your credit reports everyone can see it. I am in the middle of a lawsuit right now (as the plaintiff’s expert witness) where a collection agency pulled the credit reports of an alleged debtor 4 times in a six-month period. It’s very likely that this group of inquiries lowered the plaintiff’s credit scores.
So what’s the best way to prevent a collection agency from pulling your credit reports and possibly lowering your credit scores? Simple, avoid collections.
John Ulzheimer is the President of Consumer Education for Credit.com and the author of the book “You’re Nothing But A Number.” He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO and Equifax, John is the only recognized credit expert who actually comes from the credit industry. He is a weekly guest on FOX’s The Willis Report and is the credit blogger for the New York Times and Mint.com. He has served as a credit expert witness in more than 65 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.
The main aim of credit reporting agencies, as we all know it, to collect their dues. Their services are very important in order to make timely credit decisions.