If you have neglected paying your bills, or a creditor's records mistakenly make it appear that you have, you may have accounts in collections. It is extremely important to know how this affects your credit and what you should do about it, as having an account in collections can be devastating to your score.
While it is best to avoid them, if you already have collections reported on your credit report, there are a few things you should know.
What is a collection?
A collection is an account that has been sold to a third-party debt collector. If you become delinquent--that is, miss several payments for anything from a medical bill to a credit card bill--the company owed will often write off this debt as a loss and sell that it to a collection agency. The collection agent will then attempt to collect the repayment from you.
While different creditors and lenders have different policies, many credit card accounts are sent to a collection agency after 180 days of non-payment. Both the original creditor and the collector are able to update the account on your credit report with a "collection" status and they are not required to tell you that your account is being sent to collections.
What does it mean for my credit?
If you have an account go into collections and reported on your credit, your credit score will drop by a substantial amount You can see how much this would affect your score with Credit Karma's Credit Simulator.
The degree to which a collection hurts your credit score is directly correlated with how high your credit score is when the collection agency reports the debt. The higher your score, the more points you will lose.
In addition, the amount of damage to your credit score is also determined by the collection amount, or how much you owe. Some scoring models now have a way of differentiating between consumers who have clear debt management problems and those who only have minor accounts in collections. For example, if the original debt you owed was less than $100, the resulting account in collections may show up on your credit report but it won't hurt your credit score.
The resulting credit score drop from having an account in collections will directly impact your future financial plans, as it may cause you to be denied for credit cards and loans, especially if the collection is recent or remains unpaid (or both).
Tips on what to do with an account in collections
Unless you negotiate with the collections agency to remove the mark, accounts with a "collection" status can stay on your report for up to seven years, whether or not you pay the debt back. While you are working out what to do with your account in collections, make sure to keep your other debts and accounts up-to-date.
As time passes, the collection account will have a less significant impact on your credit. In addition, if you pay all your other bills on time, this will help your credit score recuperate from a debt collection. You can also lessen the effects on your score by paying it off and negotiating with the collection agency to mark it as "paid in full" or "settled."
See more information on what to do if you have an account in collections.
How to dispute an erroneous account in collections
If it is not your debt, you are not required to pay it and creditors cannot list it on your report. In addition, if the seven-year period is up and the "collection" status still remains on your report or if you are still being contacted about a very old debt, it is possible that the account has been sold and resold a number of times and you should dispute the debt from your credit report. There is no statute of limitations on how long a collection effort can last, but some states do have a statute of limitations on how long a creditor or collector has to take legal action with your debt.