Pay for delete: When it helps credit score, and when it doesn't

This report cleanup practice solves only one piece of the credit scoring puzzle

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Question

Dear Speaking of Credit
Regarding Midland Funding and other "pay-for-delete" practices – will it raise your credit score to pay for delete if the original creditor is still reporting the debt?

When Midland deletes, does the original creditor delete also, or do they still report? – Bridget

Answer

Dear Bridget,
Rather than assume, as many do, that whenever something negative disappears from your credit report your score automatically increases, you’re correctly questioning whether that will indeed be the case with a “pay-for-delete.”

pay-for-delete is an agreement between a collection agency and a consumer to remove a collection account from the consumer’s credit report in exchange for payment in full or a settlement for less than the full amount.

Midland Funding is part of Encore Capital Group, one of the largest debt buying companies in the U.S. Through its subsidiaries, Encore Capital and other debt buying companies purchase credit card, medical and other debts, usually from the original creditors after many months, or even years, of unsuccessful collection attempts by the original lenders.

"Pay-for-delete" is one of the practices debt buying companies use to encourage debtors to seek a payment agreement (in 2013 Midland Funding was sued over collection practices involving judgments.)

'Pay-for-delete' solves only one piece of the scoring puzzle

When trying to raise their credit scores, however, many consumers find this solution only solves one piece of a larger credit reporting and scoring puzzle.

The other factor when considering a "pay-for-delete," which is frequently ignored, is the original account trade line for the collection debt. This item typically appears on credit reports as a charge-off, or other “bad debt” status.

Like collections, if left alone, these items remain on your credit report for seven years from the date the payment problems leading to the default began.

This quite-common credit reporting situation, where two separate derogatory items represent the same debt, is why you’re right on the money with your question – especially since the continuing presence of either item after one has been deleted can mean the difference between a pay-for-delete helping your score or doing nothing for it.

Often, when we talk about raising a credit score by removing something negative from the credit report, the focus veers toward the item(s) being deleted – usually in terms of how bad and how many.

Yet the true scoring impacts of these changes depend more on the quality of the remaining credit report than what was removed from it.

Will the original trade line remain after the 'pay-for-delete'?

With that in mind, let’s then address your concerns over whether the original creditor will continue to report the original trade line after the "pay-for-delete," and what that might mean for your score.

Normally, addressing one of your questions, a "pay-for-delete" does not apply to any other related items on your report, such as the original charged-off trade line for the debt.

For the removal of both items, the consumer typically must also reach out to the original creditor as well, requesting deletion of the trade line they’ve probably been reporting since the account was first opened.

Such requests to delete may sound similar in nature, but there is one big difference: Your promised payment provides the collection agency with an incentive to give you something in return – deleting the collection.

The original creditor, however, will have no such incentive, having written the debt off as a loss some time ago.

So, though it never hurts to try, don’t expect the same kind of love from the original creditor as from the collection agency when offering a "pay-for-delete."

And what might your score look like when left with the original trade line after a "pay-for-delete"?

Again, the resulting makeup of your credit report will dictate whether your score truly benefits from the removal of the collection, or whether you’re merely left with a better looking report.

Considering the unlimited supply of scoring scenarios, there is no simple answer to how your score may react to any "pay-for-delete," remaining original trade line or not.

How does the original trade line influence the score after a 'pay-for-delete'?

Still, we can go a long way toward setting some reasonable expectations by emphasizing what may be the single most critical scoring factor at work when a late payment or other negatively reported account appears on your credit report: the length of time since the most recent derogatory item.

For convenience, we’ll call it “recency.” And as you’d expect, the longer this length of time, the better.

Anticipating the influence of a "pay-for-delete" on your score when the original trade line remains is simply a matter then of comparing the recency of the most recent negative account on your credit reports from before and after the collection was removed.

  • Example No. 1: If, for instance, the removed collection was six months old and the only remaining derogatory item is the original charge-off from two years ago, your score could rise with the "pay-for-delete." This is due to your most recently occurring negative incident going from six months to more than two years ago by the time the collection is gone.
  • Example No. 2: On the other hand, let’s take the same situation, but add another unrelated collection also from six months ago. With the deletion of one of those collections via a "pay-for-delete," you’re essentially left with what you had in the prior example before the deletion – one six-month old collection, one two-year old derogatory trade line. In this second example, the deletion of one collection would leave your most recent remaining negative item no older – and perhaps your score no higher – than had there been no "pay-for-delete."

How to know what to expect?

As you can see, any score improvement from a "pay-for-delete" will rely heavily on how the recency of your latest negative item prior to the deletion compares with the recency of your latest negative item after the deletion.

In a nutshell, the larger this gap becomes, the higher your score might rise (all other things being equal).

While admittedly a hard topic to pin down, hopefully you now have a better feel for what to expect from a "pay-for-delete," whether or not the original trade line remains. Good luck!

See related: 'Pay-for-delete' debt settlement comes out of the shadows, Pay for delete: A shady credit-report cleanup practice

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Updated: 01-19-2018