If your bills have been piling up, or a creditor’s records mistakenly indicate that you have a bill in collections you should investigate and resolve the issue with due haste. It is essential for you to understand the nature of the bill and validate whether you, in fact, actually owe the debt. There are rare instances where consumer debt has been misreported to a collection agency. Having any kind of debt on your credit report can be very detrimental to your ability to get credit and the type of rates you receive for that credit. While it is best to avoid them, if you already have collections reported on your credit report, there are a few things you should know.
What is debt collection?
A debt collection can result from a debt that has not been paid on time. If you become significantly ill , such as a medical bill or credit card bill, the original company owed will often write off this debt as a loss and sell it to a collection agency. The collection agency will then attempt to recover the money owed.
While different creditors and lenders have different policies, many credit card accounts are sent to a collection agency after 180 days of non-payment. Either the original creditor or the collection agency may report the account in collections to a credit bureau, resulting in the account being marked on your report with a “collection” status. You will not necessarily be notified by the original creditor that your account is being sent to collections.
If an account in collections is reported on your TransUnion or Equifax credit report, you can access your full report or the collections page to view details about any reported accounts. (You’ll only see the collections page if open or closed collections accounts have recently been included on your report.)
What does it mean for my credit?
If you have an account reported as in collections, your credit score may drop by a substantial amount. The degree to which a collection hurts your credit score is generally correlated with how high your credit score is when the collection agency reports the debt. The higher your score, the more points you can lose.
In addition, the amount of damage to your credit score may be affected by the collection amount, or how much you owe. For example, if the original debt you owed was less than $100, the resulting account in collections may show up on your credit report but it may not significantly hurt your credit score or even hurt it at all. Some credit scoring models may also differentiate between types of debt, such as medical versus non-medical, or disregard accounts in collections that have been paid.
The resulting credit score drop from having an account in collections can impact your future financial plans. It may cause you to be denied for credit cards and loans, especially if the collection is recent or remains unpaid (or both).