Unpaid Debts and Accounts in Collection

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Debts are dangerous - even more so if you haven't paid them for a long time. Debts not only bring down your credit score but can also harm your credit history if they pass into collections. An account in collections can be catastrophic to your credit health. It is in your best interest to know how it can affect your credit and how you can deal with it. Before we delve into all that, let's quickly understand the concept of an 'account in collection.'

What is a Collection Account?

When you fail to repay a loan for a really long time, your creditor turns your account over to a third-party debt collection agency. The collection agency takes over the responsibility of collecting the debt from you on behalf of the original creditor. In such circumstances, your account gets listed as a 'collection account.' The credit bureaus collect the payment report and compile them into your credit report.

A debt generally becomes a collection account after it becomes considerably delinquent. If you have stopped paying a medical bill or a credit card bill, the original company might write off the debt as a loss and sell it to a collection agency, and henceforth, the collection agency will make attempts to recover the amount.

The original creditor doesn't need to notify you if your account is being sent out to collections. However, you can gain access to this information whenever you check your credit report. You can view the full report on the 'collections' page or section.

How to Find Out if You Have Accounts in Collections?

For instance, say you took a home loan last year from a bank. This year, you find you have no money to keep paying the EMIs. If the bank is unable to get its returns, it writes off the account as a bad debt and loss to the company. It also gives this account to a collection agency.

A collection agency does all that it legally can to take the remaining money from you, and even take you to court for failing to do so.

The bank is not under any obligation to tell you when your account is given over to a collections agency. It is your responsibility to know when it happens and which agency you owe your money to. Thus, it begs the question: how can one find out if you have any debt or accounts in collections?

  1. Access Your Credit Report: The very first thing you need to do while searching for any debt accounts in collections is to check out your credit report. Three major credit bureaus, namely Equifax, TransUnion, and Experian, can provide you a credit report for free every 12 months. In case you have any debts in collections, they will show up in the report.

  2. Check If a Credit Agency Contacted You: Collection agencies specialize in collecting back the money owed by you to the bank, or any other lender for that matter. However, collection agencies don’t get paid if they don’t get the money back. This means that they will try to contact you. If you recently changed your address or phone number, they won’t be able to reach you. However, you can get their details from your credit report.

  3. Ask the Original Lenders: If you are fairly sure that you may have debt in collections, but do not know which agency to contact, ask your original lender. As they stand to gain the money from you, they would be more willing to tell you. However, there shall be no grounds for negotiation with the original lender if the debt account is already sold to the collection agency.

  4. Check the Credit Report Again for Contact Info: If you want to know how to pay the designated collection agency, you need to check your credit report. It should have all the necessary information which allows you to contact the collection agency.

How Do Collections Affect Your Credit Score?

If you have a high credit score at the time when the collection agency reports the debt to the credit bureaus, you are likely to lose a lot of points.

The amount of your debt also plays a role in deciding the amount of damage that your credit score will receive. If your debt amount is considerably less, it might show up on your credit report, but it won't hurt your credit score much.

Different credit scoring models have different ways of dealing with your debt. Some models consider the type of mortgage; some models even disregard collection accounts once the debt is paid off and settled.

However, a credit score drop due to a collection account can severely impact your future financial plans. If you have a recent collection account or an old unpaid one, creditors can easily deny you credit cards and loans.

Tips to Manage a Collections Account

The way you handle your accounts in collection largely depends upon your situation. If all the information in the collection account is accurate, you could try to negotiate with the collection company and settle it. Simultaneously, make sure that you have kept your other accounts and debts updated.

With time, the damaging effect of the collection account on your credit score will recede. If you pay all other bills on time and project a responsible borrowing habit, your credit score should revive quickly.

Disputing an Erroneous Collections Account

Just like other reporting errors, your collection account might also contain a mistake. The record might be outdated, or the report might provide incorrect information. If you can identify an error, you must seize the opportunity and file a dispute with the concerned credit bureau.

If you notice that your credit report contains records of a delinquent collection account that is more than seven years old, you can request the bureau to remove the information.

To Sum Up

You should always be careful with your finances so that you don't land in debt. If you do, settle your debt before it turns into a collection account. If you are unlucky enough to have an account pass into collections, put on your thinking cap, and evaluate the situation before taking action. Needless to say, checking your credit score regularly is essential for you to get back on track.

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