Navigating Debt Collections from Your Credit Report

In the journey toward financial empowerment, it is unquestionable that debt collections can be a major obstacle in maintaining your financial health. Studies show that about 30 per cent of Canadians have faced some form of debt collection activity as a result of unpaid bills, loans, and/or credit cards. This is a significant amount, especially when you consider the impact debt collections can have on your credit score and access to credit. In this article, we’ll provide expert advice and tips on how to manage debt collections on your report and repair your credit post-debt collection.

Understanding the Impact of Debt Collections on Your Credit Report

Debt collections are something which must be acted on immediately, as the presence of this debt can significantly and continually impact your credit. There are a number of ways in which debt collections can directly lower your credit score:

• Payment History: When it comes to how your credit is scored, your payment history makes up nearly 35% of your credit score. If a debt goes to collections, this will be indicated to the bank as a missed payment. Furthermore, paying consistently late will continue to have a negative effect on your payment history. 
• Length of Time Account is Active: A collection account can stay on your credit report for multiple years. If the debt remains in collection status, meaning it hasn’t been paid or forgiven, it can stay on your report and continue to have a negative impact on your credit score. This will drastically affect your ability to access low-interest loans, mortgages, or rentals for years after the debt has reached collections. 
• Re-Aging Debt: Sometimes a collection agency will take on your debt and ‘re-age’ the debt by marking it as a new collection. Since recent debts have a bigger impact on your credit score, this means that re-aging will double its potency. 

A collection amount can lower your credit score up to 100 points or more, though it will depend on what your ability to pay off debts was like prior to the collection showing up on your report. 

Know Your Rights: Canadian Credit Reporting Regulations

Debt collectors are mandated by several regulations within Canada. Understanding your rights as a Canadian consumer can help equip you with the knowledge needed to protect yourself from malpractice. 

Consumer Protection Act

The Consumer Protection Act, known in provinces outside of Ontario as the Fair Trading Act (FTA), protects consumers from unfair or deceptive trading practices. With the FTA in place, consumers have the right to accurate information about a product or service, non-penalized contract cancellation, and to be treated fairly in the marketplace. This means that deceptive practices like false advertising, misleading representations, and unfair contracts are unpermitted. Debt collectors must follow the principles of fair treatment, honesty, and transparency with consumers. They can not harass or threaten you in any way, shape, or form, and they can not misrepresent their authority. 

If you believe a debt collector has violated your rights, you can file a complaint here. 

Credit Reporting Act

The Credit Reporting Act (CRA) is designed to regulate the operation of credit reporting agencies. It has established specific guidelines regarding the collection, storage, and transmission of consumer credit details. The Credit Reporting Act gives consumers the right to access their credit reports and the autonomy to dispute inaccuracies. Credit reporting agencies, as a result, must ensure that the credit reporting they conduct is as accurate and up-to-date as possible. Credit reporting agencies are obligated to remove debt collections from your credit report after a certain amount of time.

How Long Does Debt Collection Stay on Your Credit Report?

The amount of time a debt collection can remain on your credit report is also regulated by the Credit Reporting Act. The amount of time until it must be removed will depend on the status of the collection. 

The 6-Year Rule for Closed Debts

If a debt has been settled or marked as closed, which will either mean it has been consolidated or paid off, it will only be able to stay on your credit report for six years. Credit reporting agencies are mandated to remove your debt from your credit report six years from the date the debt was consolidated. This closed debt will have an impact on your credit score, but this impact won’t be nearly as severe as an open debt. The influence your closed debt has on your credit score will decrease with time. 

Indefinite Status for Open Debts

If a debt is still open, which in other words means it hasn’t been paid off or consolidated, it can stay on your credit report indefinitely. This debt will continue to hinder your credit score and creditworthiness until it has been consolidated or paid. This can result in stricter loan terms, higher fees and interest rates, and being declined when submitting a credit application. 

Communicating with Creditors and Collection Agencies

There is power in engaging with creditors and collection agencies proactively. Effective communication can help you resolve the outstanding debt. Below is some guidance on how to communicate with them appropriately.

Requesting Debt Validation: What You Need to Know

When you first receive a collection notice, you should be proactive in requesting debt validation. It is your legal right under the Credit Reporting Act to request this validation. The collection agency will be legally obligated to verify the debt is legitimate and that they have a right to collect it. 

Send a request in writing to the collection agency within 30 days of receiving the notice. You should be proactive and vigilant in requesting proof that they own the debt and that the amount being claimed is accurate to the amount owed. When writing this letter:

1. Be Clear and Concise: Be clear that you are requesting validation as your right under the Credit Reporting Act. Ensure your contact information and any relevant account details are in the letter. 
2. Keep a Copy: Keep a copy of the letter for your records.
3. Send It via Certified Mail: Sending through certified mail will give you proof of delivery as well as a verifiable timeline for the agency to respond. 

In the event that the collection agency can not, or does not accurately provide you with validation, they are legally obligated to cease collection activities related to your debt. Once this has occurred, you are able to request that the entry is removed from your credit report. 

Building Your Credit After Debt Collections

Once you’ve addressed or paid off the debt, you should shift your focus over to rebuilding your credit score. Here’s how you can get started:

• Create a Budget: Start with a strict and realistic budget to manage your current finances and ensure all payments are accounted for and made on time. 
• Consider Secured Credit Cards: Utilizing a secure credit card can help you begin re-establishing creditworthiness during and after you’ve paid your debt. 
• Monitor Your Credit Report: Consistently monitor your credit report and track the progress of your credit rebuilding. You should also ensure there are no inaccuracies, especially if an agreement has been made to resolve the debt without paying in full. Sometimes, a collection agency will come back to request the remaining amount even if an agreement has been reached, which is why it’s vital to get the agreement in writing as soon as it is made. 

Conclusion

Removing debt collections from your credit report may feel fruitless, but it can be achievable and very rewarding if done effectively. By having knowledge of your rights, validating owed amounts, disputing errors, and negotiating settlements, you can empower yourself to resolve the debt and begin revitalizing your credit. Rebuilding credit takes time, patience, and thoughtful planning of your finances, but being consistent will help you replenish your financial health. Here’s to an autonomous and bright financial future!