Collections… What comes to mind while reading that word? For some it means very little, but for others it might bring to mind difficult times in the past, or even poor decisions.
In last weeks post The How-to Guide to Destroying Your Credit Score, we touched on the topic of collections. So this week we will take a second look by exploring the danger involved in collections and how to avoid them.
Let’s first put things into perspective by answering a few questions about collections.
- What is a Collection Account?
An unpaid account sold by the original creditor to a collection agency, due to unpaid or neglected debt. While different creditors and lenders have different policies, many accounts are sent to a collection agency after 180 days of non-payment.
- How many people have debt in collections?
In the United States, there are a reported 77 million people with credit profiles. Out of the 77 Million, 1/3 have an account in collections. That’s a whopping 25.6 Million with Collection Accounts within the US. source: www.urban.org
An important piece of information is that debt doesn’t need to be GIGANTIC to go to collections. Even a debt of $100 can be considered for a collection account.
A few common types of collection accounts are student loans, credit card debt, utility bills, cell phone bills, and medical bills. So let’s look at how we can handle them.
The dangers of not knowing the facts
There are several dangers associated with allowing an account to go into collections. The biggest danger is not knowing the facts. A lot of people will let a debt go into collections because they feel overwhelmed with their insurmountable debt. Yes it can be overwhelming, but take courage. Your creditor will work with you. The worst thing you can do is ignore them. Keep in contact and work out a deal with them.
Another danger is not knowing your rights. Each State has a Statute of Limitations, which in general is a time limit in which an individual or business has to file a claim. In most cases(states differ), the Collection Agency cannot file their claim (record/report your debt) to the credit bureaus after 7 years.
There’s a twist to this – If you have a collection account – let’s say it’s a $2,000 debt that has been in collections for 5 years. Does that mean the account will drop of your credit report in 2 years ? (7 years total)
Yes… BUT the twist is that if the collection agency has contacted you and identified that you are in fact the person originally owing the debt, the 7 year Statute of Limitations will restart. The 7 year restart also applies if you make a payment on the debt (which involves you making contact). Bottom line… know your rights!
How to Avoid the dangers
Not to sound like a broken record… but the goal is to take action on your account before it goes to collections. As mentioned above you can save yourself a giant drop in your credit report, and disappointments in your future by simply keeping in contact with your creditor and attempt to work out a deal.
The second and last piece of advice is directed to those of you that currently have debt in collections. Don’t lose hope! There are options. There is always the Statute of Limitation, but that’s a very long road. It’s highly recommended to reach out to your collection account holder and work out a deal. They’ll often agree to you paying a large percentage of the debt and close the account.
Also, if your credit score isn’t completely destroyed you can consolidate your debt, like with student loans found here.
Do your research and look for ways to continue improving your credit score. If you need professional help contact us here at Inversion Credit. We can discuss the options for repairing your credit.