Simple Answer: Once the unpaid debt entry hits the credit report, the fear of not paying in the debtor’s mind is gone. You just used the most effective debt recovery tool before giving the debtor enough time to settle the unpaid.
The debtor thinks, “Well .. this is the worst scenario .. then why should I even bother paying now?“.
Even if he makes payment later, the entry stays there (as paid), still negatively impacting his credit score for the next seven years. If a credit report entry is done too soon, it in fact discourages many debtors from making payments. Do not rush into credit reporting. Use it wisely.
Some debt collection agencies agree to remove the entry from the debtor’s credit report once the bill is paid, but this is not common. Offering the removal of a genuine credit report entry in exchange for payment is considered a highly unethical practice among credit reporting agencies and the accounts receivable industry. The provision to remove credit report entry was allowed only to fix mistakes and not to be used as a tool for debt collection.
Credit reporting agencies (Equifax, Experian and Transunion) may forbid a collection agency if this violation is caught multiple times. Also, removing an actual late payment from the credit report risks those lenders who might give a loan to this person in the future.
Most experts in this industry recommend that credit report entry be done after all debt collection means have been exhausted and the debt is more than 180 days past due.
Only medical credit report entries are an exception. Once the patient or his insurance company pays off a debt, it must be removed from the credit report. However, by law, they cannot be reported before one year. Once paid, all debts are marked as paid in full on the credit report and not deleted entirely.
Creditors and collection agencies who prefer to do credit reporting quickly will likely see lower recovery rates. The fear in the debtor’s mind is gone. However, collection agencies that delay credit reporting keep this valuable tool for later use.
Although creditors and collection agencies can pursue legal means of debt collection like garnishing wages, placing a lien on the property, or freezing the debtor’s bank accounts, not more than 20% of debts qualify for legal action, either the low balance or the complexity of the case.