Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Pyles.
Liz Weston: And I'm Liz Weston. To have your money questions answered on a future episode, turn to the Nerds. Call or text us on the Nerd hotline at 901-730-6373, that's 901-730-NERD, or email us at [email protected].
Sean: And to get new episodes delivered to your devices every Monday, hit that subscribe button, and if you like what you hear, leave us a review. In this episode, Liz and I answer a listener's question about how long a collections account stays on your credit report. But first, in our This Week In Your Money segment, we're talking about something that we have not done in far too long: travel.
Liz: Specifically, air travel, because now that more of us are getting vaccinated, more of us are taking to the skies. In fact, more than 10 times as many travelers passed through the TSA in the first week of April compared to the same period last year.
Sean: But like with everything in these after times of the pandemic that we're slowly inching toward, travel isn't quite the same as it was before COVID hit. And before folks begin to pack their bags and get together with friends and family again, we wanted to talk about what folks should expect and how to get the best deals right now.
Liz: How are you approaching booking flights right now?
Sean: I'm trying to do them early and often, like voting in Chicago, and that is because airline prices are going to go up from here. And Hopper, the flight price tracking app, estimates that ticket prices are going to go up 4% to 5% a month until the summer, so I have some travel booked already. And the plans, we just put them on the calendar so we can have something on the books, but we realize that they might change, depending on the way of the world. The good thing is that once you have that flight booked, that credit stored on your account, if you do need to change your flight, airlines are still being very, very flexible if you do need to change your accommodations.
Liz: And some of us have a lot of points and miles piled up from the past years.
Liz: So it's going to be interesting to see what's available once we start looking.
Sean: And the general rule of thumb according to our travel folks at NerdWallet is that if you're going to book with points versus cash, points are typically the best way to go right now because, when it comes down to it, you can use cash to purchase anything from a snack at the airport to a nice meal at your destination, but the points can really only typically be used for flights.
Liz: That makes sense. And we have a calculator to help with these calculations, right?
Sean: Right. There's a calculator that we have that can help you determine whether you should be using cash or miles because one thing that's so tricky with miles is that the value of one airline's miles is not the same as that of another, and it can get really overwhelming if you're trying to make an apples to apples comparison when it's to really like apples to mangoes to coconuts.
Liz: That's a good way to put it.
Sean: Speaking of which, I want a tropical drink now.
Liz: Apparently. Or a tropical vacation, one or the other. But you know, Sean, even when I'm fully vaccinated I'm a little bit leery about hopping on a plane.
Liz: So how do people know whether the airline is going to be safe?
Sean: You're right. Each airline does have its own safety policies. Fortunately, folks at NerdWallet put an article together that outlines how different airlines are handling this. And there's a scale from 5 being the safest and Delta is currently at the top there, to 1. And at the very bottom is Spirit at 1.8. And the things that make the difference with Delta is that they have very flexible change and cancellation policies. They actually extended the expiration date of their travel vouchers through 2021. And throughout the winter, a lot of airlines just quietly ended their capacity limits, but Delta actually extended that at least through April 30 of this year.
Liz: And I think people should also know that vaccinations don't really open up the whole world to you. There are a lot of countries, in fact, most countries are still not letting U.S. travelers in.
Sean: And it seems to change every day as we're seeing a new swell of cases in different countries. For example, right now, passengers from Brazil aren't allowed into a number of European countries. That could change in a month, or not. You really do have to stay on top of where things are in your current destination. And again, stay flexible.
Liz: I think people have to take into account their own health, their own risk factors, how comfortable they are. I know my husband and I just decided, "You know what? We're not going to fly this summer." We had plans to go abroad, of course.
Liz: And we're just going to leave it for one more year. And we think, "Well, you know, we're missing out on some great deals, perhaps, but I think I'll be more comfortable just waiting a little while." How about you, Sean?
Sean: So I actually do have some travel planned. I have a lot later this year, but coming up in early May I'm going to meet up with some family in Minnesota for a memorial service that had been postponed from August. And I'm feeling a lot more comfortable now that I'm vaccinated and my family members are. And reading up about how airplanes filter the air in the cabin makes me feel pretty safe there. I'm a little leery of other people that will be on my plane and in the airport, but I'm going to do what I can to feel safe in that environment.
And then for my birthday in June, I have my twin sister coming out to visit me, and then I have some friends from college coming out to visit me. They're all going to be vaccinated and take the precautions that they need to on the flight. And then this fall I have three weddings to attend.
Liz: Three weddings. Wow.
Liz: I guess those back up over time.
Sean: Yeah, especially with last year, everything was punted over to this year.
Sean: So I'm excited for it. It'll be good to see my friends. It'll be good to see cities that I haven't been to in far too long. But right now we have these on the books but we'll see what the world looks like come fall.
Liz: Fingers crossed. Another thing to consider is if you have kids and they're not vaccinated yet, obviously that's going to shrink your options even further.
Sean: Because a number of countries, specifically in Europe, are requiring that everyone be vaccinated before entering. And as we know, folks under 16 are not yet eligible for the vaccines.
Liz: So the bottom line, according to Travel Nerd Sam Kemmis, is that prices are going up, airfare is more flexible now, so it might be worth booking sooner rather than later if you are going to fly, and rebook if necessary.
Sean: Great advice. All right. And with that, I think we can get on to this episode's Money Question.
Liz: This episode's Money Question comes from a listener's voicemail. Here it is.
"Well, my question is I have paid off a lot of my debt. I run my credit report every month, I have seen those paid-off collections but still it’s showing negative impact on my credit score. How long will that stay on my credit report even though those collections are being paid? Thank you.”
Sean: To help us answer this listener's question, on this episode of the podcast, we are joined once again by Credit Nerd Bev O'Shea
Bev O'Shea: Thanks for having me. It's good to be back.
Sean: It's always a joy to have you, Bev. So our listener is wondering about how long a collections account will stay on their credit report. And this is one of the rare instances where the answer to our listener's question is actually fairly straightforward?
Liz: Right. Technically, a collections account can stay on your credit reports for 7 years, plus 180 days. So 7 1/2 years from the date the account first went delinquent.
Sean: The one thing that's interesting with collections is that there's a difference between when you have an unpaid account versus a paid account and how those are marked on your credit report, and then how those are perceived by potential future creditors. Can you talk about these different options?
Bev: If you have a collection it's probably marked either paid, settled or satisfied if you've done what our lister has done. If it has not been satisfied, you still owe it and your credit report will reflect that. The way that affects your score is going to vary by score.
Liz: Right. Because with many scores, it doesn't help to pay a collections account. That includes most older versions of the FICO score.
Bev: It does help with VantageScore 3.0 and 4.0, and it helps with the two most recent FICO scores.
Liz: One thing we should make clear is that there are a lot of different credit scores out there. And you typically can't know in advance which scores a lender will use, which means it's also hard to predict the effect on your credit scores.
Bev: If your credit score is already very low and there's lots of damage, it doesn't hurt as much, but you're never going to be able to bring up your credit score if you continue to pay late, it's too hard.
Liz: Another area where there's a lot of confusion has to do with that time limit on how long a collection can get reported on your credit reports. The clock does not get restarted every time a collection account is sold.
Bev: It does not, but that is a mistake that is frequently made and some people will even see the same collection show up multiple times with different collections agencies. And if that happens, you can dispute the error and get it fixed on your credit report. But it does not start the time and it shouldn't be listed again.
Sean: And this brings me to something else I wanted to bring up because collections accounts can be so complicated and confusing, and by the time you find it on your credit report you probably have forgotten about it entirely. I know that happened to me one time. One thing that's really important to know is that right now you can actually get a free copy of your credit report every week from each of the three major credit bureaus. And it's important to compare your own personal records to what you're seeing on your credit report to what even the debt collector is giving you. So make sure that you're getting accurate information about the account, including its age and your payment history.
Liz: Yes, please. Don't rely on a collection account to tell you the truth.
Sean: So what can someone do if they have a collections account on their credit report, their score is taking a hit, and they're trying to reverse the damage?
Bev: Are we going to assume that this is a valid debt?
Sean: Yes. If this is a valid account.
Bev: OK. Best thing that you can do is start where you are. If you have some credit accounts, credit cards, begin to use those, use them responsibly, pay them back on time every time, and keep your balances low.
Sean: Also, the effect fades with time, correct?
Bev: Absolutely. And if you can put positive information on there, it will fade faster.
Sean: You mentioned whether this is a valid account or an invalid account, and that's a really important point because there are so many errors in the debt collection process. If this is an invalid account on your credit report, it's really important to dispute that with the credit bureau that lists the debt because that needs to be taken off and the credit bureaus have an obligation to do that.
Sean: I also want to talk about something else, which is maybe a controversial way to get a collections account off your credit report. And there are two things here that people should know about. One is a goodwill deletion, the other one is called pay for delete, and they're kind of similar.
So with a goodwill deletion, you can ask the current creditor, whether it's the original creditor that had the account to begin with or a third-party debt collector, you can write them a letter explaining why the account went into collections. Maybe you lost your job, maybe you were experiencing a global pandemic, who knows what it could have been, but you were unable to pay this debt and it went to collections. And they may be sympathetic and actually delete that account from your credit report without you even paying it. That's an option that some people have pursued.
And then with pay for delete, it's actually kind of like a trade and this is even more controversial. Basically, you contact the debt collector and say, "Hey, I will resolve this account if you delete this off of my credit report." And this is controversial because people say that it erodes the integrity of the credit reporting system.
Liz: And it's a long shot in any case because many collectors just won't play ball.
Sean: Yeah, it can be unlikely. But you know, I actually had an experience that was somewhere between these two where I discovered a collections account from a utility company that I had a contract with back in college and I just totally forgot to resolve the account when I moved away. Years later, I found the account on my credit report and I quickly called them, paid off the small amount of my balance, and the next time I looked at my credit report, the account was simply gone. So without me even asking, they took the account off my credit report.
Bev: Good for you, Sean, you were lucky. I don't think that happens to everybody.
Sean: Yeah. I think that's a very good point, this isn't something that everyone will get, it was just the folks in Vermont being very kind to me and my credit report, but it's not going to happen every single time.
Liz: So let's talk about some other reasons it might be a good idea to pay off a collection.
Sean: Well, the first one that comes to mind is that it can prevent you from being sued by the collector and then potentially having your wages garnished. That is, first and foremost, why you really should want to resolve a collections account on your credit report.
Liz: Obviously we have to take into account statute of limitations because there's only a certain amount of time that a creditor can sue you and it varies by state so you need to look that up.
Sean: Mm-hmm. And then even beyond that, if you are going to be doing something big, like applying for a mortgage, it's going to look a lot better if you do have a collections account if you have one that is resolved. Having an unresolved collections account isn't going to look great on your credit report.
Bev: I mean, even a paid collections doesn't look great, but it looks a lot better than an unpaid collection.
Liz: And some people just feel a moral obligation to pay off their debt. What should they keep in mind, Bev?
Bev: They should keep in mind that they may not have a legal obligation to pay. And if it were me, I would look very carefully at the debt. How much of it was in fees, late fees, interest? And if I wanted to pay it back because I felt a moral obligation, I think I would pay back the part that I felt like I'm morally owed.
Sean: And if you are paying back a debt in collections, especially if you're paying back to a third-party debt collector, it's worth knowing that these debt collectors buy debts for pennies on the dollar and they typically have a lot of wiggle room to negotiate.
Bev: Right. And the older the debt is, the more room you have to negotiate.
Sean: Well, Bev, anything else that you think folks should keep in mind if they're dealing with collections accounts on their credit reports?
Bev: Be sure that the person that you're paying is the person who owns the collections account. They're bought and sold so often that you want to be certain that you're paying the right person.
Sean: And to that end, if and when you do pay off the collections account, make sure to keep very careful track of your records because, just because you paid this off, doesn't mean that another debt collector might not try to erroneously collect it.
Bev: And, Sean, if by chance, you are able to get something like pay for delete or a goodwill letter, if somebody agrees to do something, be sure you have it in writing.
Sean: Always good advice. Well, Bev, thank you so much for joining us. I always appreciate it.
Bev: Always a pleasure, Sean.
Sean: And let's get onto our Takeaway Tips. Liz, do you want to kick us off?
Liz: My pleasure. First, a collections account could follow you for a while. They generally remain on your credit report for seven and a half years from the date, the account went delinquent.
Sean: You may be able to lessen the damage. Resolved collections accounts are ignored by newer credit scoring models, though they're not yet used by all lenders.
Liz: Finally, work to offset the damage of a collections account: On-time payments and keeping balances low can help, as can the passage of time.
Sean: And that is all we have for this episode. Do you have a money question of your own? Well, turn to the Nerds. Call or text us on the Nerd Hotline at 901-730-6373. Or you can email us at [email protected]. Also, visit nerdwallet.com/podcast for more info on this episode, and remember to subscribe, rate, and review us wherever you're getting this podcast.
Liz: And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstance.
Sean: And with that said, until next time, turn to the Nerds.
