Accounts in Collection – What Does It Mean?

Credit accounts that have been turned over for “collection” are considered very serious. They can do long-term damage to your credit scores – and are a red flag to lenders that you may be unable, or even worse, unwilling to repay your debt.  If they remain unpaid and lead to legal action to collect the debt, the detrimental impact on your scores is magnified.

Debts are placed in collection because they are often well beyond the 120-day delinquency period.

Creditors can sell the debt to a collector or hire a collection agency to try and collect the amount due, with the agency often receiving a percentage of the total amount collected.

“Collection accounts can have a pretty negative impact on your credit rating, although they come far behind bankruptcies, foreclosures and short-sales in their impact,” says Todd Christensen, Director of Education for Debt Reduction Services, Inc.

 Virtually any unpaid debt can become a collection.

“There’s a certain progress, a linear timeline, when accounts start falling behind and working their way towards delinquency,” explains Bruce McClary, Vice President of Public Relations and External Affairs, and a spokesperson for the National Foundation for Credit Counseling. “That timeline goes from 30 to 60 to 90 days past due, then from that it goes to a charge-off state, then stays in charge-off/collection for a while.”

When a debt goes to collection varies with the type of debt and amount of time since your last payment. As a rule, credit cards, utility bills, retail accounts, cell phone bills and other personal services head to a third-party collection agency once they reach 180 days without payment.

Student loans go into default if you haven’t made payments on your loans for 270 to 360 days. Once this happens, some loans are placed in collection.

Medical bills that go unpaid can appear on your credit reports after 180 days. This six-month window gives you and your healthcare providers and insurers time to resolve claim and billing disputes before your credit scores pay the price.

Usually, after 180 days the original creditor will “sell” the debt to the collection agent at a loss; in essence, they are accepting that reduced fee as their full payment. The collection agent, however, receives nothing until you pay the debt. As a result, they are highly motivated to extract payment.

 How collections hit your reports.

By the time your debt makes its way into the hands of a debt collector, it’s already been reported to the credit bureaus as seriously past due by the original creditor.

The third-party debt collector will often report the debt to the credit bureaus as delinquent, which is a damaging entry on your credit reports. As long as the debt remains unpaid, the debt collector can continue to inform the bureaus. It will stay on your reports for seven years from when it became delinquent, said Steve Rhode, founder of Personal Finance Syndication Network.

Rhode adds that some collectors will “play games and list the debt again as if it were a new, bad debt. Just dispute that new entry.”

Debt collections’ impact on your credit scores.

After unpaid debt goes to a third-party collection agent, a hit to your credit scores is probably inevitable. There are a number of factors – the age and size of the debt, in particular – that will increase or decrease the impact on your credit scores.

Chris Viale, President of Cambridge Credit Counseling Corporation, says the “fact that an account is at a collection agency weighs against the consumer’s score, but the precise number of points lost also depends on how much other good and bad information is in the credit report at that moment.”

Christensen puts a finer point on the impact, stating, “Although they come far behind bankruptcies, foreclosures and short-sales in [terms of] their impact, a single collection account can drop your credit score by five to 10 percent (or about 40 to 80 points).”

Another factor that will increase (or decrease) the total negative impact of a collection is the length of time you have had the debt. Credit reporting bureaus are likely to consider this age along with other information when they calculate your scores, and discount debt that was racked up a long time ago.

“In general, the more recent the entry, and the greater the amount owed, the more damage inflicted on the credit scores,” Viale says. “Paying off a collection account within the first 24 months will improve a consumer’s score, but after that, the scoring impact is negligible.”

Viale notes that if the debt in question is a medical one, you may be in luck. “Old medical debts that have been paid in full will be automatically deleted from a consumer’s credit reports,” he said.

Likewise, “The older the activity on the collection account, as with any other type of information on your report, the less it impacts your score,” adds Christensen.

However, Viale warns, “The credit score is only one factor in a lending decision. A lender may still react negatively to old, unpaid collection accounts.”

Collection turned civil judgment is another credit score blow.

If a creditor or debt collector takes you to court to collect on a debt, you will receive a summons making you aware of the court date and the details of the hearing. Never ignore a lawsuit summons. If you do, you will almost certainly forfeit the case, and you will lose the opportunity to fight a wage garnishment. If you lose the lawsuit, that judgment may be reported to the credit bureaus, under the public records section, and your credit scores will take yet another hit.

Civil judgments state the amount of money you owe and allow the creditor or collector to get a garnishment order against you, directing a third party (such as your bank or employer) to turn over funds from your account.

Wage garnishment is one of the most disruptive outcomes of a debt collector successfully filing a judgment against you in court.

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