What is a collection, and why does it matter?
With a busy school schedule and all of life’s unexpected events, sometimes it can be hard to keep track of our bills. However, missing payments can result in a collection on your credit report. A “collection” is an unpaid debt that is being managed by a collection agency. Collections can come from any unpaid bills, such as loans, credit cards or utilities. Loans and credit cards typically go into collections after an extended period of time without payments. They can also come from merchants for things like unpaid library fines, doctor’s visits or if a check bounces.
Having even one collection on your credit report can cause your credit score to drop. That means you could pay higher interest rates on loans and credit cards. Having too many collections can also result in being denied for loans, housing or even employment, which could be very problematic down the road.
What do collection agencies do?
There are two main types of collection agencies. The first acts as a middleman between the financial institution, the lender, and the borrower. The collection agency reaches out to the borrower in an attempt to get back as much of the debt as possible. The collection agency then earns a commission based on the amount it recovers.
The second type of collection agency purchases the debt from the lender. Some lenders will choose to sell the debt at a portion of what is owed in an attempt to recover at least some of the loss. The debt is then owed to the collection agency rather than the original lender.
How do I find out if I have any collections?
In many cases, if you have a collection, the collection agency will attempt to reach you by phone or mail, but you cannot rely on this because the agency may not have your most up-to-date contact information on file. To be certain that you have no outstanding collections, go to www.annualcreditreport.com. AnnualCreditReport.com is a free service that allows you to pull a copy of your credit report from each of the three credit bureaus – Experian, Equifax and TransUnion – once a year. You are able to pull all three at once or spread them out over the course of the year.
If you do find any collections reported, be sure to reach out to the collection agency for more information and to make payment arrangements. You may also try reaching out to the original creditor, but they may not be able to assist you if the debt has been sold to a collection agency. If you have a collection that you believe is incorrectly reported or is fraudulent, you can file a dispute with each of the three credit bureaus.
How will this affect my credit?
Once a collection is paid, many collection agencies will remove it from your credit report. That can help repair your credit score quickly. If you are unable to pay in full, some agencies will accept a partial payment, called a “settlement.” If the collection is settled, the collection agency may or may not remove the notation from your credit report. If it is not removed, the collection will drop off seven years from the date the final payment is made.
Mistakes happen, and it is easy to miss a payment. As long as the appropriate steps are taken to resolve any resulting collection, your credit score will recover. Just remember to be proactive and work with the collection agency to find a payment plan that works for everyone involved.