How to understand this confusing dynamic
When you first take out a loan or open a credit card, the company you’re dealing with is the original creditor. If you fall behind on payments, that company may eventually sell the debt to a third party, which then becomes the current creditor (or a “debt buyer”). Understanding this distinction is vital, as it affects how the debt is handled, negotiated, and displayed on your credit report.
Here is an easy-to-understand guide on what these terms mean, how debt is bought and sold for pennies on the dollar, and where to find this information on your credit report.
Part 1: Original Creditor vs. Current Creditor
The difference between the original creditor and the current creditor is about who you made the initial agreement with versus who actually owns the debt now.
The Original Creditor
The original creditor is the bank, lender, or company that first gave you credit or a loan. Examples include your credit card issuer (like Chase or Bank of America), the hospital where you received treatment, or the car dealership that financed your purchase.
- Their Goal: To provide a service and earn a profit from interest or fees.
- Their Process (when you miss payments): They will first try to collect the debt themselves, sending you notices and calling you. After several months of nonpayment (typically 120-180 days for a credit card), they will “charge off” the debt, which is an accounting term meaning they consider it a loss on their books.
- Their Advantage: They usually have all the original contracts and a complete history of the account.
The Current Creditor (Debt Buyer or Collection Agency)
Once the original creditor charges off the debt, they often sell it to a debt buyer. This debt buyer is a company that specializes in purchasing delinquent debts for a very small percentage of the total amount owed.
- Their Goal: To make a profit by collecting as much as possible on the debt they purchased.
- Their Process: They now own the debt and will contact you directly to collect on it. Once a debt is sold, you generally deal only with the debt buyer, not the original creditor.
- Their Disadvantage: They may not have all the original documentation, which can be an advantage for you if you dispute the debt.
Sometimes, the original creditor might instead hire a third-party collection agency to collect the debt on their behalf (contingency basis). In this case, the original creditor still owns the debt, but the agency does the collecting for a percentage fee.
Part 2: The Business of Buying Debt – Pennies on the Dollar
The practice of buying and selling debt is a massive industry. Debt buyers purchase these debts in large portfolios (lists of thousands of accounts) through a bidding process.
The Price Tag
The price paid for debt varies widely depending on factors like the age of the debt, the type of debt, and the completeness of the documentation (known as “media”).
- Averages: On average, debt is bought for around 2 to 5 cents on the dollar, but older debts might sell for even less. A $1,000 debt might be purchased for just $40.
- The Profit: If a debt buyer pays $40 for a $1,000 debt and then convinces you to pay $500 to settle it, they make a profit of $460.
What This Means for You: Negotiation Power
Because debt buyers acquire debt so cheaply, they have a lot of room to negotiate. While they will always ask for the full amount first, they are often willing to settle for a lower amount (e.g., 30-50% of the balance) and still make a significant profit.
Part 3: Where to View This on Your Credit Report
You can get your official, free weekly credit reports from all three major bureaus (Equifax, Experian, and TransUnion) at the only federally authorized website: AnnualCreditReport.com.
When you access your reports:
1. The Original Creditor’s Entry
The original creditor will still have an entry on your credit report for up to seven years from the date the account first became past due (the “original delinquency date”).
- What to Look For: This entry will typically be marked with a status like “charged off,” “closed,” or “transferred to another company,” and a zero balance (since the debt was sold off their books). The remarks section should indicate that it was “sold” or “transferred” to a collection agency.
2. The Current Creditor’s Entry (Collections Account)
The debt buyer or collection agency will have a separate entry on your credit report, usually under a “Collections” section.
- What to Look For: This entry will list the collection agency’s name as the “creditor” or “furnisher.” It will show the current balance owed (the full amount, initially).
- Identifying the Origin: Within this entry, there will be a field that explicitly names the Original Creditor (e.g., “Original Creditor: Bank of America”). The debt collector is required to provide this information in their initial notice to you or within five days of first contact.
By checking your credit report, you can clearly identify who originally extended the credit and who currently owns the debt, giving you the information you need to negotiate effectively and ensure accuracy.
