By MIKE GOLDSTEIN
Young Americans tend to make big credit and financial mistakes in their 20s, only to spend a lot of time and money making up for it. It's a cycle of quick mistakes and slow recovery that passes on from generation to generation, and it begs for better financial education for young people. We've called this phenomenon, identified by a recent Credit Karma / Qualtrics study, the Credit Fumble.
An account going into collections is a pretty common result of a Credit Fumble. Consumers who fall behind on payments for a credit card or other line of credit can end up having their debts sent to a third-party collections agency, which then tries its best to recoup its investment by getting the borrower to pay up.
Having an account sent to collections isn't only stressful - it can also wreak havoc on your credit. Whether you have an account in collections is a pretty important measure of your credit health, so we decided to take a look at where young Americans (aged between 18 and 24) were most and least affected by this unfortunate phenomenon.
Top 10 cities where young people have the most accounts in collections
While these 10 cities don't follow a tight geographic pattern, they do correspond fairly well with an Urban Institute study that tracked debts in collections by state. Collections accounts can definitely be the result of youthful carelessness or inexperience (like forgetting about a bill you have to pay), but it's worth noting that they might also be the result of real economic conditions, such as employment rates and the local minimum wage.
"Regional economic conditions can play a role in the debt delinquency rates from state to state," says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. "Areas where wages are lower or unemployment levels are high could lead to a higher occurrence of missed credit card and loan payments."
The possibility that high unemployment rates could be causing more collections accounts is reinforced by this list. The Charlotte, Greensboro, Las Vegas, Reno and Birmingham metropolitan areas all have unemployment rates over 5 percent, for example, which puts their unemployment rates in the upper half of American metro areas according to November 2015 data from the Bureau of Labor Statistics.
Top 10 cities where young people have the fewest collections accounts
Why young people are especially prone to credit mistakes
Our study found that it's pretty common for Americans to make serious credit mistakes when they're in their late teens and their 20s. In fact, 68 percent of Americans make at least one major Credit Fumble before turning 30, including 44 percent who had an account sent to collections because they couldn't or didn't pay off their debts.
One of the big reasons why appears to be a lack of education. 69 percent of survey respondents reported they didn't understand what credit scores were when they first got their credit card, and 42 percent said "irresponsibility" was a major reason they made financial mistakes before they turned 30.
Having an account sent into collections often fits into this category of youthful slip ups. Being unable to pay off a debt can be the result of many different causes, including racking up more debt than you can pay off or falling victim to an unexpected change in your financial situation. It can also result from beginner's mistakes like not having your mail forwarded when you move and consequently missing a bill.
What can you do?
Accounts in collections can be bad news for credit scores. How much damage they do can depend on the size of the debt owed, how long it's been on your report (they can stay there for at least seven years) and the other particulars of your credit situation. Regardless, they're generally best avoided -- so it makes sense to take precautionary steps against them, like setting up autopay for credit cards to avoid missed payments and regularly checking your credit reports for any debts you might not recognize.
If you're already dealing with an account in collections on your credit report, there may not be a whole lot you can do other than waiting it out. If it's inaccurate, you can file a dispute directly with the credit bureau to have it removed from your credit report. If you believe the account in collections to be accurate, though, you might want to consider negotiating repayment with the collections company directly.
"For people with debt that has become past due, (they) believe that things will get better if they avoid communication," McClary says. "Hiding from creditors or debt collectors only compounds the problem."
It's also important to stay aware of what your rights are as a consumer, and what a collections agency can and cannot do while trying to collect from you.
If you scuffled through your early 20s, making financial and credit mistakes along the way, you're certainly not the only one. While the prevalence of accounts in collections can vary from state to state and city to city, they are certainly a nationwide problem, and one that's not so easy to recover from either. With all Credit Fumbles, though, education can be the first step to getting back on track.
For the Credit Fumble survey, Credit Karma and Qualtrics surveyed 1,051 Americans aged 31-44 in November and December 2015 about the trouble they faced managing their personal finances before they turned 30. For the collections by city data, we looked at the average amount of open collections accounts for Credit Karma members between the ages of 18 and 24, who live in the 100 largest cities in the United States and pulled their credit report through Credit Karma in 2015.
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