Collections on your credit report

Elderly man on phone, woman holding paperwork

When an account becomes seriously past due, the creditor may decide to turn the account over to an internal collection department or sell the debt to a collection agency. Once an account is sold to a collection agency, the collection account can then be reported as a separate account on your credit report. Collection accounts have a significant negative impact on your credit scores.

Collections can appear from unsecured accounts, such as credit cards and personal loans. In contrast, secured loans, such as mortgages or auto loans, that default would involve foreclosure and repossession, respectively. Auto loans can end up in collections also, even if they are repossessed. The amount they are sold for at auction may be less than the full amount owed, and the remaining amount can still be sent to collections.

Collections can be removed from credit reports in only two ways:

1. If the collection information is valid, you must wait seven years from the original delinquency date for the information to cycle off your credit reports. The original delinquency date is the date the account first became delinquent and after which it was never again brought current.

2. If collection information is inaccurate, you can file a dispute on the collection information in your credit report. Depending on what the inaccuracy is, the collection account may be updated rather than removed. Learn more on how to dispute credit report information.

What “going into collections” means

Man making phone call, woman using computer

Depending on the type of debt owed, collections can affect you in different ways. If your debt is unsecured, such as credit card debt, and you default on your payments with that debt sent to collections, the credit card company would stop trying to collect the debt from you. Instead, the collections company that your debt was sent to would pursue the debt and try to collect money from you. If your debt was secured, such as an auto loan and you default, then the lender might repossess your car, sell it at auction, and sell the remainder of debt you owe to a collections company. Lenders can collect money from debt in the following ways:

• Contact you on their own and ask for payment using their internal collection department.
• Hire a collection agency to try and collect.
• For revolving debt, such as credit card debt, the credit card company could sell your debt to a collection agency, which would then try to get the money from you.
• For installment loan debt, such as an auto loan, the lender may repossess the car, sell it at an auction and then, if the amount the vehicle is sold for is less than the balance owed on the contract, any remaining balance becomes what is known as a deficiency balance. This amount remains a debt you are responsible to pay.

The federal Fair Debt Collection Practices Act strictly regulates how debt collectors can operate when trying to recover a debt. For example, they can’t threaten you with imprisonment — or make any other kind of threat— if you don’t pay. However, they can — and typically do — contact you to discuss payment options for the amount past due and report the unpaid debt to credit reporting agencies.

How long do collections stay on your credit report?

Collections are a continuation of debt owed and can stay on your credit report for up to seven years from the date the debt first became delinquent and was not brought current. However, if an account were to become late today, the payments were never brought current, it was charged off as bad debt, closed and sent to collections, then the original delinquency date would be today’s date.

After seven years, that negative information will automatically drop off your credit report, even if a collection agency has assumed the debt. The clock on the debt doesn’t reset if it’s transferred to another creditor; your original delinquency date remains the same for both the original account and the collection agency account.

Couple reviewing debt collection paperwork

How collections impacts your credit report and credit scores

Your credit report is meant to give potential lenders information on how you’ve used and managed your credit responsibilities with both positive and negative information. If you pay your bills on time and keep the balances on your accounts low, your responsible credit behavior will be reflected on your credit report. However, if you’ve paid late or skipped payments altogether, that information will also appear on your report.

Late payments, skipped payments, and collection accounts are all a factor in determining your credit scores. Any kind of negative information can affect your credit scores because lenders see such information as an indication you may not be managing your credit well, such as overspending or falling behind on payments. A low credit score could make it difficult for you to obtain future credit with favorable interest rates and terms.

A late payment on a credit report is negative, and the more recent a late payment is, the greater impact it has. Accounts that get to the collection stage are considered seriously delinquent and will have a significant and negative impact on your credit report.

How to find out if you have accounts in collections

Elderly couple using computer

Typically, the collection agency will try and contact you and notify you of the collection account. However, it is possible you might be unaware that an account is in collections if you have moved or the debt collector has been unable to reach you, or if the debt is the result of identity theft.

The best way to make sure you’re aware of every piece of information that may affect your credit report and scores, including collections, is to regularly check your credit report and credit scores.

Used with permission from Experian.

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