Credit bureau reporting and debt collection are not the same thing. Reporting delinquent debts to the credit reporting agencies Equifax, Experian and Transunion is one of the tools that can be used to help collect a debt. Many people believe it to be the most important thing a collection agency can do for them, but it is only one tool. And, in my opinion, many collection agencies rely too heavily on it. Let me explain.
Not getting paid stinks. It is an insult and a betrayal of trust. Although it is a business issue, it feels personal. You are angry and call a collection agency to help recover the money owed to you. The first thing you tell your collection agency is that you want the debt reported to the credit bureau because you do not want your customer to “get away with it”.
There is a huge problem with that type of thinking. Your customer has already gotten away with not paying you. You have nothing – zero. So instead of focusing on getting back at the customer, focus on recovering as much as you can.
This is where the collection agency comes in. Ask your collection agency what they will do to recover for you. If credit bureau reporting is the first thing they tell you, it likely means that is pretty much all they are doing. Perhaps they are sending a letter and making a few calls, but after a month or so, the debt is parked on your customer’s credit report and nothing new happens.
So does credit reporting actually help collect a debt?
It can motivate your customer to pay the bill so as to avoid the impact to their credit score. Also, there is a chance that even if your customer does not care about their credit score today, they will at some point in the future. Federal and state laws vary on how long debts can be reported, but the “future” could be years from now though. How long do you want to wait? What is your collection agency doing in the meantime?
I was speaking with a small business client this morning regarding a person who owes $3,200. My client asked me to report the debt. I said I would be happy to do so, but I told her that the person already has a 450 credit score with many small collections. One more is not going to make much difference, and it has not motivated this individual to come to the table on those other debts. I suggested we keep working to reach her, and get her into a payment plan.
In my experience, most people sent to collections are not primarily concerned with their credit scores.
It may be an issue, but it is not the most important issue. The most important issue, the one we hear again and again, is the inability to pay. Therefore it makes sense to work with people and get them into affordable payment plans, rather than punish them for something that may be totally out of their control. Even for those customers that intentionally stiff you, your focus should not be on getting even with them. Your goal, and the goal of your collection agency should be to recover as much money as possible. It can be done without credit reporting. I know – I have been doing it for 14 years.
As of July 1, 2017, credit reporting agencies must remove many debts that did not have key identifying information on such as social security number and date of birth. Going forward, if do not have complete information on customers, the credit bureaus may be unable to accept reporting. The impact of medical debt on a credit score has also been minimized So an active plan for recovery becomes even more important.
Credit reporting and debt collection, therefore, are two distinct things. One is a tool that may or may not work, and the other is a process – an action word. The actions you and your collection agency take will make the difference in getting you paid.