How Do Collection Accounts Affect You and Your Credit?
According to the Federal Trade Commission and the Consumer Financial Protection Bureau, debt collectors are one of the most complained about businesses and with good reason. Few people have positive experiences dealing with debt collectors. Even the rare nice ones can be a nuisance, even if just for the fact that they're calling for money. After debts have become seriously delinquent, it's typically cheaper for businesses to use collectors, so it's not likely that debt collectors are going anywhere soon.
As a consumer, it's best to know how debt collectors operate in case you ever have to deal with one.
What Is a Debt Collection?
A debt collection is a type of financial account that's been sent to a third-party debt collector. Debt collectors are companies who collect unpaid debts for others. The original company with which you created the debt most likely assigned or sold the account to the collection agency after you missed several payments and it was unable to get you to pay. It's usually more cost-effective for companies to hire debt collectors than to continue to spend their own resources pursuing payment on delinquent accounts.
Different creditors and lenders have different policies for sending accounts to collections. Reviewing your credit card or loan agreement will often give you some information about your creditor's timeline. Many credit card accounts are sent to a collection agency after 180 days, or six months, of non-payment. Other types of businesses may send accounts to collections agencies after just a month or two or missed payments.
What to Expect When You Have a Collection Account
When they're trying to get you to pay your debt, debt collectors will call you, send letters, and notify the credit bureaus of the collection account.
If they have your work phone number, debt collectors may even call you at your place of employment unless you let them know your employer doesn't approve of those calls. Some collectors have been known to show up at a person's home in their attempt to collect a debt. Surprisingly, that's legal. Debt collectors might even call your cell phone, if you gave the number to your creditor to contact you.
Debt collectors can only call you between the hours of 8 a.m. and 9 p.m. your local time. Debt collectors may call you several times a day, especially if you're dodging their phone calls. However, collectors are forbidden from calling you back-to-back in an attempt to annoy you.
When a debt collector has a hard time reaching you, they may call your friends or neighbors to make sure they have the correct contact information for you. They're allowed to do this, but they're not allowed to reveal that they're collecting a debt and they can't contact the same person more than once.
Debt collectors will send payment notices to the address they have on file for you. In their first bill to you, they have to notify you that you have 30 days to request validation for the debt. Requesting validation forces the debt collector to provide proof that you owe the debt. The debt validation notice may also be given to you over the phone if a phone call is the first time the collector is contacting you. If they don't have the correct address, you may never receive a notice of the debt. And if the collector doesn't have your correct phone number or address, you may not find out about the account until you see it listed on your credit report.
Debt collectors are required to follow the Fair Debt Collection Practices Act, or FDCPA, when they're collecting a debt from you. However, the thousands of complaints consumers make against debt collectors each year proves that they don't always follow the law.
How Collections End Up On Your Credit Report?
Your credit report contains information about your credit accounts, e.g. credit cards, loans, etc. Most, if not all, of your creditors send monthly updates about your payment status to your credit report.
When an account is sent to a collection agency, either the original creditor or the collector updates the account on your credit report with a "collection" status. The creditor doesn't have to tell you that your account is being sent to collections. However, the debt collector does have to notify you that they are collecting the debt before they can take any action. A collection account may appear on one or all three of your credit reports depending on which credit bureaus the debt collector has an arrangement with.
What Does It Mean For Your Credit?
Your credit score will drop if a collection appears on your report. You may be denied for credit cards and loans in the future, especially if the collection is recent or remains unpaid or both.
Accurate debt collection accounts can stay on your credit report for up to seven years. If your credit report contains a collection that doesn't belong to you, you can have it removed by disputing it with the credit bureau.
You can lessen the effects of a collection on your credit score by paying it off. As time passes, the collection account will affect your credit less. Continuing to pay all your other bills on time will also help your credit score recover from a debt collection.