There is a lot that you need to know about debt when you are struggling with it. One of the most essential things that you need to know is how unpaid debt can go to collections and affect your credit score for years and years to come.
Debt appears in collections for many reasons. The most common reason is that it is simply left unpaid and monthly bills are neglected. However, it also commonly happens when a creditor makes a mistake with their records. In this case, you may have an account in collections without having done anything wrong.
Whatever the case for your debt being in collections, it is extremely important to understand how this affects your credit and what you can (and should) do about it.
Your Best Bet
Yes, this piece of advice is going to be obvious, but it is worth stating before getting down to business: staying out of debt is the best way to avoid collection calls. Though it is very straightforward and simple, many people don’t heed or even consider this very simple advice. By setting up a budget plan and a debt payment plan (when you do use your credit cards or take out a loan), all of the problems and solutions discussed below can be easily avoided.
It is essential that you understand what a collection is before you can attempt to look at what they do to your credit. In a simple sense, a collection is a debt (oftentimes referred to as an ‘account’) that has been sold by the creditor to a debt collector.
A collection often occurs when you miss multiple monthly payments on a particular bill. The company that lent you the money (for instance, a credit card company) might then choose to sell this bill to a collection company. They are then able to write this debt off as a loss and at least keep a little money in the process.
The collection agency that bought the bill from your creditor will then attempt to collect payment for the debt from you. They often employ much ‘tougher’ tactics of obtaining repayment than a creditor would. Unpaid bills are generally sent to collection agencies after 180 days.
Collections and Your Credit
Your credit is a very fragile thing and a debt that goes to collections can impact your credit score in a big way. When a debt goes to collections, your credit score will drop big-time.
The amount that your credit score will drop from a collection account depends on how good (or how ‘high’) of a credit score you have in the first place. If you have a higher score, the more points it will drop. If you have a lower score, the fewer points it will drop.
Furthermore, the level in which your credit score is affected by a debt going into collections is also determined by the overall amount of the debt and how much you owe on it.
What You Can Do
The best thing that you can do when an account goes to collections is to make sure that you keep up on current debt and bill payments. Pay off your debts while in collections. One collections item is enough to tarnish your credit score for up to seven years. However, working with this mark on your score is usually manageable. This is not so if you have had two or more debts go to collections.
It is important to keep in mind that the more time that passes the less of a mark your collections item will have on your overall credit score. In fact, by paying your other bills on time, you can actually improve your credit score in the process. Check out this blog post for a few other ways to repair your credit score.
What You Can Do About an Error
As mentioned above, errors involving collection items generally do occur. If you check your report and notice a mistake, you are not required to pay the debt off (nor should it affect your credit report). However, you are required to notify the proper authorities about your mistake. The first thing to do is contact the credit bureau and tell them what part of the report you believe is inaccurate. Next you should contact both your original creditor and the collections agency and let them know that they made an error. This link on fixing credit report errors has even more top quality information.
There is no doubt that debt in collections can affect your credit score grievously. The tips, tricks, and advice discussed above should help you sort out any errors and deal with any collections items that pop up.