If a creditor can't get you to pay your bill, it will eventually write it off as a bad debt for tax purposes and sell the debt to a third-party collection agency. Although you still owe the debt, it won't be the original creditor coming after you. The debt collector will attempt to recover the debt. Under federal law, the buyer of your debt has a right to pull your credit report.
Access to Your Credit Report
The Fair Credit and Debt Reporting Act protects your privacy by requiring your consent before a third party can check your credit. However, there's an exception when it comes to debt collectors. Under the act, a business with a legitimate need can access your credit report. A debt owed to a collection agency qualifies as a valid reason to run a credit check without permission.
Tracking You Down
If you've ever wondered how a debt collector tracked you down after you changed your address and phone number, your credit report is likely to blame. If you've updated your contact information with your current auto finance company or credit card issuer, it will generally inform the credit bureau of the address change. Even if your creditors don't have your new address, credit bureaus can use public records to update the address. If you've recently applied for new credit, the bureaus will report the contact information you indicated on your application.
Although debt collectors can't discuss your debt with your employer, they've got a legal right to call them at least once. The Fair Debt Collection Practices Act gives debt collectors permission to verify employment by contacting your employer. They can't mention who they are or the nature of the call, but they can inquire about your employment. Debt collectors use this information to determine if it's worth suing you. If they do decide to sue and win, they can use the employer contact information to help enforce the judgment. For example, if your state law permits wage garnishment, the debt collector can present your employment information to the court.
Impact on Your Credit
When the creditor pulls your credit report, it'll count as an inquiry. A single inquiry has a minimal impact on your score, but multiple inquiries can add up to a noticeable drop. Once the statute of limitations for debt collection expires, the debt collector no longer has a permissible reason to obtain your credit report. Statutes of limitations vary depending on the type of debt and the state. If the debt collector is checking your credit report on an out-dated debt or one reported in error, you can contact the credit bureau to dispute the inquiry.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.