What Does It Mean When an Account Goes to Collections?

Every once in a while, life can throw us all curveballs. You may run over a stray nail and get a flat tire, or a medical emergency may come up. To remedy these situations, you may need money fast, and credit cards can often be the best solution to turn to. 

But what if you forget to pay those credit card bills on time? Unfortunately, your debt may be sent to collections.

Collections are when a creditor or third party seeks to collect debts that are past due by at least 30 days. 

Let’s look at how collections work, their impact on your credit scores, and how to avoid going into collections so you can protect your credit scores.

Navigating debt collection is a frustrating ordeal. The constant phone calls alone can make you want to throw your hands in the air and give up. But resolution is possible, so don’t curse the day you ever started using credit cards just yet. 

Common Reasons for Collections 

Not all debt looks the same. You can accumulate a bunch of different credit lines over time, which can actually be great for your credit history. The problem arises, however, when your debt becomes too much to handle and you begin to skip payments.   

A variety of unpaid bills can end up in collections.

The most common types of debt that go into debt collection include:

• Credit card balances
• Student loans
• Auto loans
• Medical bills
• Bank fees and overdrafts
• Utility bills
• Fines imposed by courts and government agencies

Having these types of debts is fine, but paying them on time is crucial to protecting not only your credit score but also your peace of mind. 

The debt collection process can be stressful, so staying on top of your bills can help you avoid the process altogether. 

Some exceptions can apply. For instance, if you don’t pay your car bill for several months, the lender can repossess your car and forgo sending your account to collections if the current value of your car is more than the remaining balance on your loan. 

The Role of Collection Agencies

Collection agencies are like the clean-up guys of the financial industry. They may do the annoying dirty work, but they are essential to the financial ecosystem.  

Debt collection agencies step in to help companies mitigate the risk of bad debts and reduce the amount of debt they write off each year. They take over the collection process and free up businesses’ time to work on other tasks. 

When lenders discover unpaid bill payments in their systems, they can contact a collection agency and turn over the process of collecting the debt from the consumer to it. 

From that point on, only the collection agency will work to recover the debt. 

Once a debt collector has purchased your debt, it will then begin the collection process by calling you to retrieve the outstanding balance and past-due payments. Agencies can also contact you by mail, email, or in person. 

They can also obtain the right to access your bank accounts if they sue you for your past-due payments, though that is only possible with a court judgment. Cases can only be filed within the statute of limitations of your state.

Debt collectors also take care of the resolution. Once you complete your payments, the collection agency can resolve your debt. 

The Collections Process

The collections process can look different depending on your lender, the type of debt owed, and the amount owed. Some debt collectors go to extreme lengths, such as ordering you to court, but this isn’t commonplace. 

If a lender does sue, you must appear in court, or the judge will automatically rule against you. Then the debt collector can take more aggressive action and garnish money from your bank account or wages. Again, these situations aren’t typical or the go-to solution for most lenders.

The typical collections process involves the following steps:

1. Creditors Attempt to Collect Debt: Before sending your debt to collections, the creditor will make initial contact with you to attempt to collect your debts. Your creditors will alert you of your past-due payments and encourage you to pay them. 
2. Debt Transferred to Collection Agency: If you don’t pay the bill, lenders will then cease efforts to recover your debt. They will then transfer your debt by charging off your account and selling your debt to a collection agency. 
3. Resolving the Debt: Once debt collection takes over the process, it will contact you via phone, email, social media, or mail to retrieve the past-due payment. You can then call them to verify the unpaid debt and dispute it, if applicable. If the debt is yours, you can settle the debt to pay a lower amount or negotiate a repayment plan, so you can pay off the debt and get it resolved. 

The timeline by which creditors send your account to collections can vary. Unpaid credit card debt can reach collection status as early as 30 days after a missed payment. Once that happens, the credit card issuer can send your account to its own in-house collection agency. 

Credit card companies without in-house collection departments charge off your debt, close your account, and sell your debt to a third-party agency. This part of the process usually takes place 120 to 180 days after your first missed payment.

Different types of loans have different timelines for debt collection. So you could have an account sent to collections anytime from 30 to 180 days after a missed payment. Paying your bills on time and taking your original creditor’s warnings seriously can help you avoid the ire of collections entirely. 

Unfortunately, collections can impact your credit score and future financial standing. In fact, it can cause long-term damage, meaning you should try to avoid having an account sent there at all costs. 

Immediate Effects 

Delinquent payments can impact anyone’s credit score, but the ones that are sent to collections have even more power because they show the level of your credit responsibility. 

A delinquent payment refers to a payment that’s more than 30 days late.

Collections can have an immediate impact on your credit score and report. Credit scoring models use variables, including amounts owed and payment history, to calculate your score. 

If you don’t pay your bills on time — or not at all — your credit score will take some form of a hit. How much unpaid debt can affect your credit score depends on the scoring model and your unique history.

Debt collection can leave a lasting impression on your credit reports, with cases remaining on your history for up to seven years. The date of your collection note also holds weight. If you have a more recent collection, it will hurt your score more than a collections note from five years ago that’s still on your report.

According to FICO, paying off a collection can lead to different outcomes. It can either increase, decrease, or have no impact on your credit score. Paid-off debt will most likely increase your score if you have nothing negative on your report. 

Long-Term Consequences

As I noted above, a collections note can be a pesky bug to eliminate from your credit history. That applies in the short and long term. 

You may be dealing with the current consequences of paying off your collections note. But long-term issues can also arise due to the duration of a collections note on your credit report. 

Collection accounts can appear on your credit report starting from either the original delinquency date of the original debt or the date of the first missed payment. Since an account can remain on your report for up to seven years, it can affect your creditworthiness for a long time.  

Lenders view your credit report to determine loan approval and terms. So having unpaid debt on your credit report can make securing new credit more difficult, especially one with favorable terms and conditions.

Unfortunately, another consequence you will have to deal with is your credit score dipping. Like I said before, the more recent a collection is, the more it will impact your score. 

However, one thing to note is that not all collections have the same impact. According to Experian, medical, paid, and small-dollar collections can have less of an effect on your score. 

Medical debt affects millions of Americans annually,  so all three credit bureaus decided to change their reporting policies and remove the following medical debt from their reporting:

• Paid medical collection debt
• Medical collections with an initial reported balance of less than $500
• Unpaid medical collection debts that are less than one year old

Credit scoring models also give less weight to unpaid medical debt. Don’t worry about smaller bills either, because, according to FICO, it will ignore collection accounts under $100 when determining your score.  

Credit Score Recovery 

Thankfully, recovering your credit score after collections is possible. You will need to establish sound financial habits to start the process of recovery. 

After resolving your debt with a collector, you should work on rebuilding your credit. This process may take some time — months or even years — but you can get there. 

Here are some tips to help you get on the right track:

• Pay your bills on time. If you can’t pay them in full, try to pay the minimum amount.
• Consider setting up payment alerts or automatic payments.
• Report your rent payments to credit bureaus to prove consistency and a positive payment history, which can help strengthen your score.
• Decrease your credit utilization by keeping your card balances low. 
• Consider a credit-building card to help you increase your score over time. 

Implementing these tips can change the way you manage your credit for the better, strengthening your credit score one step at a time. 

Legal Rights and Protections

We’ve all heard horror stories about collections and the consequences that come with them. It’s enough to induce anxiety when or if you ever get that call. But there are ways to address the collections process to maintain your peace of mind and protect yourself against aggressive or deceptive tactics. 

You have rights — legal ones — to combat unethical collection practices. 

Under the Fair Debt Collection Practices Act (FDCPA), collections agencies are not permitted to do the following:

• Harass or abuse you or anyone in your family with threats or incessant phone calls
• Use false statements, such as falsely implying legal action or that you committed a crime
• Contact you at unusual times (before 8 AM or after 9 PM) or places, such as at work
• Speak to you directly if you have an attorney representing you
• Make social media posts about your claim

You can also opt out of forms of contact and communication altogether. You can send them a written statement informing collections agencies that you don’t want any further contact unless a change has occurred. 

FYI: The Fair Debt Collection Practices Act only covers individual consumers, not businesses. It also doesn’t cover collection by the original creditor or business you owed money to. 

Financial mishaps can happen to anyone. But learning how to manage your finances can help you avoid the impact of unexpected financial troubles. 

Budgeting and Financial Planning 

Learning how to be a responsible borrower is an important step in promoting a healthy financial lifestyle. Managing your credit responsibility not only helps you avoid negative marks on your credit report but also helps you improve your approval rates with financial opportunities. 

To start, I recommend considering budgeting and financial planning to help you become a better borrower. Having a good plan in place for how you make payments and monitor your credit can help lessen the impact when rainy days do come. 

By purchasing within your budget, you won’t overspend or drive up your credit balances, making it more difficult to pay off debt. You can integrate automatic payments or payment due date reminders as well, so you won’t miss any payments or fall behind. 

Creating a contingency plan can also be good prep work. For instance, if you save enough money for emergencies, you won’t have to use credit to pay your other bills while you allocate funds to pay for a sudden medical bill or auto invoice.

Communicate With Creditors 

One of my favorite sayings is “It never hurts to ask.” It totally applies to credit payments. 

If you sense you’ll have trouble paying a bill, reach out to your creditor. You may be able to reconfigure your payment plan and create one that will be satisfactory for you and your creditor.

To negotiate, you can call your lender and explain your situation. You should inform them of the reason why you need to pay late and how you plan to fix the situation going forward.

You should also refer to your payment history and customer loyalty to prove credit responsibility and why they should want to retain your business. Setting up an arrangement with a creditor where you can skip a payment, decrease the minimum payment amount, or reduce your interest rate can help tackle your debt and avoid collections. 

Use Financial Assistance Programs 

Thankfully, there are plenty of financial services out there to help you get on track with credit and debt relief. By using these services, you can form strategies and find solutions to prevent collections from ever happening.

One of the primary steps you can take is talking with an accredited credit counselor. 

Your counselor can help you create a budget, develop a plan for debt payments, and negotiate with creditors on your behalf. 

Check out the National Foundation for Credit Counseling to find the right nonprofit counselor for your needs.

Your counselor may recommend other debt services, including credit repair and debt management, in conjunction with your sessions to improve your debt relief.

Not all credit repair services are trustworthy, so make sure to ask your counselor for a recommendation. 

Besides counseling, other nonprofit organizations, including United Way, offer local resources for debt management. For example, the United Way may offer various services in your area, including community resources, financial education, and emergency financial assistance, to assist people dealing with debt.

These organizations can help address immediate needs, such as utility bills, rent, or food.

Researching different debt relief programs can also lead you to a solution for managing your debt and reducing your load. Debt relief programs typically have qualifications you must meet, so look at your financial situation to determine if they will be a good fit for you. 

You may have to juggle multiple credit obligations, including unexpected ones, in your lifetime. Going into collections, however, should be the last resort. It can have lasting effects on your finances and credit opportunities. 

Unfortunately, paying bills is a lifelong thing. Even so, setting up a budget and keeping a light hand on your credit cards can help you avoid collections and all the stress that comes with it. If you do find yourself struggling with a bill, reach out to your creditor or a financial assistance program to create a plan to help you tackle debt going forward.