If you become delinquent, that is, several months late on a payment for anything from a phone bill to a credit card or a medical bill, the original creditor can charge-off your debt and transfer the outstanding balance to a collection agency to retrieve any monies you owe. This generally happens after six months of non-payment.
Typically, consumers get overwhelmed with debt and fall behind on their monthly payments for a period long enough for the creditor to give up hope of receiving payment. At that point the account is closed and sold to a collection agency.
Not long after, the offending consumer will see a new account on their credit report related to the collection. The existence of the collection account is considered a major derogatory event and one you should avoid at all costs if you want to maintain a good credit score.
If a collection shows up on your credit report, your credit score will likely drop 20-50 points or potentially much more, depending on your overall credit history and depth, and other related factors. At that point you need to make an intelligent decision. Should you pay the collection or dispute it?
Do You Owe the Debt Being Requested?
This really comes down to whether you really owe the debt or not. If you feel you don’t owe the money, you can ask the creditor or debt collector to validate the debt. This is your legal right, and they must come up with original records that prove you owe the debt.
If they can’t provide the proper documentation, you will be able to dispute the claim and the credit bureaus should remove the collection from your credit report. If they are indeed able to provide legitimate documentation, you may want to work out a deal to pay the debt before things get any worse.
What to Expect?
Once a collection account is established, the collection agency will likely contact you immediately and often. A debt collector may contact you in a variety of different ways, including in-person, phone, e-mail, fax, and mail.
Some debt collectors may be working at home via a collection agency, while others may work for an agency or at a call center.
Either way, they are restricted to when they can contact you, often only between the hours of 8am and 9pm. They can come to your residence, but it’s illegal for them to visit your workplace.
How to Stop Debt Collectors
If you wish to stop receiving contact from a debt collector, you can write a letter to the company asking them to stop. Once the debt collector receives your letter, they aren’t allowed to contact you again unless to inform you that they are taking some type of action against you, or simply to tell you that they acknowledge your request and will cease contact.
Collection agencies cannot collect an amount greater than your actual debt unless your state law permits it. If the balance is higher than the original amount owed, it may be due to interest and fees. They also may not use profane language, threaten you violently, or state that you will be arrested if you don’t pay your debts. Many collection agencies use scare tactics like these and many other unscrupulous methods to get consumers to pay up, but these companies and their employees break the law in doing so.
Work with the Original Creditor
The best way to handle a collection is to contact the original creditor and work out a deal as soon as possible. Try to set up an agreement whereby you’ll pay the amount due if they change the status of the account to “paid as agreed.” And make sure you get this agreement in writing!
If they don’t agree to such an offer, and you know you owe the debt, you may want to pay it to avoid escalating the situation. If you know you don’t owe the debt, you can write a letter to the credit bureaus disputing the debt, at which point the original creditor has to respond within 30 days or the collection account will be completely removed from your credit history.
Also note that if you have an old collection that is still unpaid and showing up on your credit report, you may be required to pay it off when applying for a home loan. Lenders will want to know that you have the means to make good on existing bad accounts.
Do keep in mind that lenders and other financiers can deny requests for new credit if you have unpaid collections, even if your credit score is considered “good” or higher than average. They may view unpaid debts in the past as an indication of future mishandling of credit, which is a fair assessment.
Note that collection accounts stay on your credit report for seven years from the date of the initial late payment that led to the offense.
Learn more about how long negative items remain on a credit report and how to remove them from your credit history.