When an account becomes very past due, the creditor may decide to turn it over to an inside collection department. They may also sell the debt to a third party or refer the account to an outside agency.
Once an account is sold to an agency, the collection account can then be reported as a separate account on your credit report. Collection accounts have a largely negative result on your credit scores.
Collections can appear from unsecured accounts, such as credit cards and personal loans. Defaulting on a secured loan could involve foreclosure or repossession.
Auto loans can still end up in collections, even if they are repossessed. Repossessed cars are often sold at auctions. If the car is sold for less than the amount that is still owed on the car, the remaining balance can still be sent to collections.
Collections can be removed from credit reports in only two ways:
1. If the collection information is valid, you must wait seven years from the original delinquency date for the information to fall off your credit reports. The original delinquency date is the date the account first became past due and after which it was never again brought current.
2. If collection information is wrong, you can file a dispute. Depending on what the error is, the account may be updated rather than removed. Learn more on how to dispute credit report information.
What going into collections means
Depending on the type of debt owed, collections can affect you in different ways.
If your debt is unsecured, such as credit card debt, and you fall behind on your payments, that debt can be sent to collections. The credit card company would stop trying to collect from you. Instead, the collections company that your debt was sent to would follow up and try to collect money from you.
If your debt was secured, like an auto loan, and you fall behind, then the lender might repossess your car and sell it at auction. Then, if you owe more after the sale of the vehicle, the rest of what you owe may be sent to a collections company.
Lenders can collect money from debt in the following ways:
• Contact you on their own and ask for payment using their own collection department.
• Hire an outside agency to collect.
• For unsecured debt, such as credit card debt, the credit card company could sell your debt to a third party, which would then try to collect.
• For secured debt, such as an auto loan, the lender may repossess the car and sell it at an auction. Then, if the amount the vehicle is sold for is less than the balance owed, the rest becomes what is known as a deficiency balance. This amount remains a debt you are responsible to pay. The lender may then attempt to collect through one of the ways listed above.
The federal Fair Debt Collection Practices Act strictly controls how collectors can try to recover a debt. For example, they can’t threaten you with jail, or make any other kind of threat, if you don’t pay. However, they can — and usually do — contact you to discuss payment options for the amount past due and report the unpaid debt to credit reporting agencies.
How long do collections stay on your credit report?
Collections are an extension of debt owed and can stay on your credit report for up to seven years from the date the debt first became past due and was not brought current.
After seven years, that negative information drops off your credit report, even if an outside agency has taken over the debt. The clock on the debt doesn’t reset if it’s moved over to another creditor. Your original delinquency date remains the same for both the original account and the agency account.
How collections impacts your credit report and credit scores
Your credit report is meant to give possible lenders a look at how you’ve used and managed your credit responsibilities with both positive and negative information.
If you pay your bills on time and keep the balances on your accounts low, your responsible credit behavior will be reflected on your credit report. However, if you’ve paid late or skipped payments altogether, that information will also appear on your report.
Late payments, skipped payments and collection accounts are all part of determining your credit scores. Any kind of negative information can affect your credit scores because lenders see such information as an indication you may not be managing your credit well. A low credit score could make it difficult for you to get credit with good interest rates and terms.
A late payment on a credit report is negative and the more recent a late payment is, the greater impact it has. Accounts that get to the collection stage are considered seriously past due and will have a significant and negative impact on your credit report.
How to find out if you have accounts in collections
Typically, the collection agency will try to contact you about the collection account. However, it is possible you might not know an account is in collections if you have moved, if the debt collector has been unable to reach you or if the debt is the result of identity theft.
The best way to make sure you’re aware of information that may affect your credit report, including collections, is to regularly check your credit report and credit scores. Read our blog post about credit monitoring to learn how.
To learn more about improving your financial health, browse the resources across our Learning Center.
Used, in part, with permission from Experian.
