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A debt buyer works primarily by purchasing debt from issuing creditors. These issuing creditors loaned money to a consumer who failed to make payments until the debt became delinquent. Once the issuing creditor determines that a debt is unlikely to be collected, they may choose to sell it to a debt buyer for a fraction of the debt amount. This benefits both the issuing creditor, who will recover at least a small amount of money, and the debt buyer, who now stands to make a profit on the debt if they can recoup anything from the consumer. Find out more about issuing creditors and how they operate.
Having a bad debt appear on your credit report is not ideal. It can signal to lenders that you are not creditworthy and prevent you from taking out other loans in the future, including a mortgage. It’s important to take steps toward improved credit, particularly since bad debt remains on a credit report for up to seven years.
It’s important to regularly check your credit report, particularly if you know that you have delinquent debt. Your credit report can show you whether the debt is still owned by the issuing creditor, or whether they sold the delinquent account to a debt buyer. If the issuing creditor owns your account, the credit report will show the balance reported from them. If the account has been sold, the debt buyer will appear beside the issuing creditor on your credit report.
For example, if the issuing creditor is Bank of America, then Bank of America will be listed on the credit report with a charge-off. A charge-off occurs when a creditor designates a delinquent account as a loss for their company and stops trying to collect the debt. In this case, Bank of America should be reporting a zero balance owed. Another entity—the debt buyer—will also be listed on the credit report with an active collection account and your balance owed.
Consumers with delinquent credit often desire to repair it later on, particularly if they become interested in buying a home. With unresolved debt collection on a credit report, it’s unlikely that the consumer will be approved to finance a home. If you find yourself in this scenario, it may be time to contact the debt buyer who owns your debt.
One step you can take towards improving your credit report is to dispute the debt buyer, but this may not always be the best solution. In many cases, the dispute will fail and the debt buyer will then be aware that you tried to dispute it. Their knowledge of your dispute is unhelpful for the situation because the debt buyer will realize that you were motivated by a goal. Since you have a reason for wanting the bad debt removed from your credit report, your motivation can be used to leverage more money from you. Disputing a debt buyer is typically only a recommended course of action if you have no means to settle the debt in another way.
Alternatively, you can try negotiating with the debt buyer to improve your credit report. While you cannot offer them money to remove an entry from your report, you can work with the debt buyer towards a lower payoff amount. Many debt buyers are willing to accept less money, since they purchased your debt at a minimal cost and can still earn a profit. Once you reach an agreement and repay the debt amount, your credit report will be updated to reflect that the debt has been resolved and you have a zero balance. Debt buyers are required by law to report accurate, up-to-date information, and having a resolved collection account on your credit report is an acceptable alternative to having bad debt removed from it.
Realistically, the only two solutions to repairing bad debt on your credit report are to have it removed or resolved. If you have the financial means to negotiate a settlement with the debt buyer, it’s in your best interest to resolve the debt and begin improving your credit. If you are unable to resolve the debt, however, then disputing it may be an option. If the dispute fails, then creating a budget can help you save money to resolve the debt and to avoid any future delinquencies.
If you need help connecting with your debt buyer, Kredit can help.