How are paid, settled, or negotiated debts reported to credit bureaus, and what are the compliance requirements and consumer impacts under FCRA and Metro 2® guidelines?
Paying off, settling, or negotiating a debt can have a significant impact on your credit report. Understanding how these actions are reported—and how they affect your credit standing—is essential for both consumers and data furnishers. The Fair Credit Reporting Act (FCRA) and Metro 2® guidelines provide clear instructions for reporting these scenarios accurately and fairly.
Definitions and Context
- Paid in Full: The debt is paid off completely, with a zero balance remaining.
- Settled Debt: The creditor agrees to accept less than the full amount owed as payment in full, often referred to as “settled for less than the full balance.”
- Negotiated Debt: Any arrangement where the terms of repayment are changed, including settlements, payment plans, or other modifications.
Each of these outcomes must be reported using specific codes and statuses to ensure compliance and transparency.
Step-by-Step Reporting Standards
1. Paid in Full
- Account Status Code: Use Code 13 (Paid or closed account/zero balance) or 61–65 for paid derogatory accounts (e.g., paid collection, paid charge-off).
- Current Balance and Amount Past Due: Both should be reported as zero.
- Date Closed: Report the date the account was paid in full.
- Payment Rating: Required when Account Status Code is 13 or 65; blank for 61–64.
- Special Comment Code: For revolving, open, or line of credit accounts, “M” (Account closed at credit grantor’s request) or “CI” (Closed due to inactivity) may be used if applicable.
2. Settled or Paid for Less Than Full Balance
- Account Status Code: Use Code 13 or 61–65, as applicable.
- Special Comment Code: Use “AU” (Account paid in full for less than the full balance) to indicate a settlement.
- Current Balance and Amount Past Due: Both should be zero.
- Date of Account Information and Date Closed: Report the date the account was settled or paid.
- Payment Rating: Required for Account Status Code 13 or 65.
3. Negotiated Payment Arrangements
- Special Comment Codes: Use codes such as “AC” (Paying under a partial payment agreement), “CP” (Account in forbearance), or “BT” (Principal deferred/interest payment only) as appropriate.
- Account Status Code: Reflect the current status based on the payment arrangement (e.g., current, delinquent, or in forbearance).
- Payment History Profile: Continue to report accurate payment history up to the date of settlement or payoff.
4. Charge-Offs and Collections
- Charge-Off: Use Account Status Code 97 (Unpaid balance reported as a loss—charge-off). When paid, update to Code 64 (Account paid in full, was a charge-off).
- Collections: Use Code 93 for collection accounts; when paid, update to Code 62 (Account paid in full, was a collection account).
- Special Comment Codes: Use “AU” for settled charge-offs or collections.
Compliance Requirements
- FCRA: Requires that all account statuses, settlements, and payoffs be reported accurately and promptly. Data furnishers must not misrepresent the nature of a settlement or payoff.
- Metro 2®: Provides technical standards for reporting paid, settled, or negotiated debts, including the use of specific Account Status and Special Comment Codes.
Impact on Consumers
- Credit Scores: Paid and settled accounts may remain on your credit report for up to seven years, but paid accounts are generally viewed more favorably than unpaid or charged-off accounts.
- Settlements: Accounts settled for less than the full balance may be seen as negative by lenders, but are preferable to unpaid debts.
- Transparency: Accurate reporting ensures that consumers and lenders have a clear understanding of the account’s resolution.
Conclusion
Reporting paid, settled, or negotiated debts accurately is essential for compliance and fair credit reporting. By following FCRA and Metro 2® guidelines—using the correct codes and updating all relevant fields—data furnishers help consumers rebuild credit and ensure the integrity of the credit reporting system.