What Is Debt Parking And What Can You Do If It Happens To You?

If you’re unfamiliar with the term “debt parking,” it’s an important one to know. “For consumers victimized by the pernicious practice of debt parking, the impact on their financial health can be devastating,” said Andrew Smith, director of the Federal Trade Commission (FTC) in Washington, D.C. That likely got your attention.

Debt parking happens when creditors or debt collectors report a debt to credit agencies without checking with you first to make sure that it’s a real debt. Often it could be something you don’t recognize or you have already paid off, but this purported debt remains visible on your credit report.

In a recent case pursued by the FTC, Midwest Recovery Systems, a debt collection agency, received enforcement action for unfair practices related to debt parking. The FTC showed that the collection agency violated the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).

While this case ended positively, no consumer wants to go through the strife incurred by having your credit score altered by faulty credit reporting.

How Does Debt Parking Impact Your Credit?

Unfortunately, the only way that lenders or even a prospective landlord or employer can determine if someone is a worthy credit risk is by checking consumers’ credit reports and credit score with credit reporting agencies. If there are purported debts on there, even if they are not legitimate, they might turn you down – and you might not even know why. That’s why debt parking can be so devastating to your financial wellness.

Ways To Prevent Debt Parking

Since you want to avoid the fallout at all costs, you’re probably wondering what you can do. Here’s what you should know.

Check Your Credit Report

Unfortunately you often won’t know that you are a victim of debt parking until it’s too late – when you’ve been denied a loan or even a job or apartment. That’s why it’s important to be proactive and check your credit report frequently, as recommended by the Consumer Financial Protection Bureau (CFPB).

Fortunately, you can get a free copy of your report from each of the three credit reporting agencies – Equifax^TM, Experian^® and TransUnion^®. The best place to access this free report is by going to Annualcreditreport.com and seeking it there. You can get an updated report every week.

The credit report forms the basis of the credit score that FICO® uses to determine your creditworthiness, which is why it’s vital to ensure that your credit report stays spotless by making sure you are paying your bills on time, keeping your credit utilization low, and not opening too many credit cards or other accounts.

But with debt parking you still could be negatively affected, even if you are practicing good credit habits, which is why you need to check regularly.

What Are Some Ways To Spot Debt Parking On Your Credit Report?

Scrutinizing your report for purported debts is the only way that you can determine if a collection agency has unfairly targeted you – and you should do that before you try to get a mortgage or an auto loan and are denied.

Two places to look are:

• Questionable debts: Take a look at each of the entries on your credit report to make sure they are truly yours. For example, you might see entries for credit cards you’ve paid off or closed, or payday loans that aren’t yours. 

• Medical debt: This is another common category where you might fall prey to debt parking due to the confusing billing practices that an insurance agency uses in the first place. The FTC says that medical debts make up more than half of the debts reported by third-party collection agencies, and more than 43 million people have outstanding medical debts on their credit reports. It’s important to look into these debts carefully as you might not owe them at all, or you might owe a tiny fraction; for example just a co-payment or other small amount once you look into it.

How To Solve A Debt Parking Issue

If you see debt you suspect doesn’t belong there, you’ll need to file a formal dispute. Each of the three credit reporting agencies offers directions for how to reach them and open a complaint into what you believe to be an error. You’ll need to touch base with all three to get it removed from your credit report. Here are the details on the process for each: 

• Equifax^TM
• Experian^®
• TransUnion^®

You can file disputes online or via mail; the CFPB has handy guides that answer questions on how to contact the credit reporting agencies, what to say and how to take action with the debt collectors as well. Their advocacy can help you get action.

Once you’ve filed a report, the credit reporting agency will look into your complaint and respond within 30 days (a timeline that has been extended because of the pandemic so you might have to wait longer). They will make the correction if they determine one is warranted. Even if they don’t end up solving the issue in your favor, you are entitled to add a statement with your credit report.

While it’s important to take action to have the debt removed from your credit report for the long run, what you want to avoid doing is just paying off the debt. That can be hard, especially if you are financially able, since that error might be all that’s standing between you and a mortgage, for example. But paying it off won’t fix the situation and might eventually make your debt problems worse.

That’s why it’s wise to check your credit report far in advance of when you expect to need credit. It’s much better for you to discover an error than have a financial activity, like a mortgage or auto loan, held up because the lenders discover something that dings your credit score.

Take Control Of Your Financial Life

As you can see, even the most vigilant consumer might someday have an issue with their credit score, if they are victim of unscrupulous tactics such as debt parking. The best way to make sure you stay financially healthy is to constantly be on top of financial matters, such as checking your credit report frequently and making sure bills are paid on time.

The benefit will be a higher credit score that will translate to more appealing interest rates and loan terms when the time comes to borrow money.