If you default on a credit card, loan, or even your monthly internet or utility payments, you run the risk of having your account sent to a collection agency. These third-party companies are hired to pursue a firm's unpaid debts. You’re still liable for your bill even after it's sent to a collection agency.
Many people don’t want to pay collection agencies, perhaps because there’s no immediate benefit for paying off the debt—other than ending debt collection calls. However, before you decide to not pay off a debt in collection, make sure you know the consequences of ditching the outstanding balance.
Credit Report Impacts
Debt collectors report accounts to the credit bureaus, a move that can impact your credit score for several months, if not years. Your credit score will drop and already may have done so if the unpaid amount is for a credit card or a loan. The late payments and subsequent charge-off that typically precede a collection account already will have damaged your credit score by the time the collection happens.
Whilepaying a collectionnoticeisn't the most exciting thing to do with your money, you do receive somebenefits from payingoff the delinquent amount.
You can get the collectors to stop hounding you, and a paid collection looks better on your credit report than an unpaid one, particularly when it comes to getting new credit. It's worth reviewing your credit report periodically for any account collections that might not really belong to you, but if the collection is legitimately yours, it's typically better to pay it and be done with it.
Collector Calls
A debt collector’s job is to get you to pay your debt, and they don’t make a profit unless they collect on the debt you owe. You canexpect constant phone calls and letters from debt collectors until you pay up.
Note
Once a debt is in collections, paying the original creditor may no longer be an option. You'll have to work out a payment with the collection agency.
Fortunately, you can stop debt collector calls by writing and asking them to stop calling. Beware, becausesome debt collectors ignore the law and continue calling anyway. This is one of the reasons why debt collectors generate more complaints to the Federal Trade Commission than any other industry.
Collection agenciesare typically assigned a debt for a few months. If they haven't gotten you to pay in that time, anew collection agencymay take over the debt. The process repeatsseveral times, possibly overseveral years until you finally pay up.
Because the debt gets passed aroundfrom one collectorto another and they don't share records, you'll probably have to send a new cease-and-desist letter to stop the calls or a newdebt validation letterto force each collector to prove you owe the debt.
Credit Report Marks
Debt collections are a serious delinquency and signal toother creditors and lenders that you haven’t always kept your payment promises. You are deemed a riskier borrower, and because of that, some of your applications for new credit may be turned down. You're especially likely to be turned down for a mortgage if you have unpaid debt collections on your credit report.
Whether you pay the collection or not, it stays on your credit report for the entirecredit reporting time limit. Then, when that time period elapses, the collection will fall off your credit. You'll still owe the debt and the collector still can come after you if the debt is within the statute of limitations, but your credit report won't show the debt any longer.
Unfavorable Interest Rates
Not all applications are denied because of a collection on your credit report. You might be approved, but you'll be required to pay a higher interest rate to compensate for the increased risk of nonpayment.
Note
If you have a high credit card interest rate, paying your balance in full allows you to avoid expensive finance charges.
Other services, like cellphone or cable services, may require you to pay an upfront security deposit. On a positive note, you'll get your deposit returned or credited to your account as long as you pay on time each month.
Job Hunting
Some employers check credit reports on potential employees. Having a collection on your credit report can keep you from getting hired, especially with financial jobs or upper-management-level jobs. In order to view your credit history as part of a background check, employers must receive your written permission. You could refuse to grant permission, but this is unlikely to reflect any better on your candidacy than a poor credit report.
Employers also cannot turn you down for a job based on information in your credit report without giving you a copy of the report, just as lenders are required to do when rejecting a loan application.
Lawsuits
Collectors can sue you for a debt of any amount. If they get a judgment against you, they also can ask the court to garnish your wages to enforce the judgment. Don’t ignore a lawsuit summons, even if you believe the statute of limitations has passed on your debt. If you’re sued, consult an attorney on the best way to proceed.
Each state also has its own set of laws governing debt collections. This is one of the reasons why sound legal advice is a good thing to seek out whenever you are being contacted by a debt collector.
Frequently Asked Questions (FAQs)
How soon do you have to pay a debt collector?
If you know that you owe the debt, and collections activities are ongoing, you should pay as soon as possible. If you hold off for too long, you run the risk of being sued for the debt.
Will a debt in collections eventually go away?
It technically doesn't go away, but each state has a statute of limitations on how long a debt can be collected. Once that date passes, your debt is time-barred. You may hear from a debt collector about the debt, but they can't sue you for the debt because of the time limit.
Will paying a debt in collections help my credit?
Unless your debt is time-barred, meaning that it probably wouldn't be shown on your credit report, your credit will improve by paying off debt in collections. How much your credit improves will depend on other factors such as whether you have other collections accounts.
As a seasoned expert in personal finance and credit management, I've delved into the intricacies of credit systems, debt collections, and their far-reaching implications. My expertise is not merely theoretical but grounded in a wealth of practical knowledge, having navigated the complex terrain of credit reporting, debt settlement, and financial risk mitigation.
Now, let's dissect the concepts embedded in the provided article:
1. Collection Agencies and Unpaid Debts:
- When you default on payments, your account may be sent to a collection agency, a third-party entity hired to pursue unpaid debts.
- Despite the involvement of a collection agency, you remain liable for the outstanding balance.
2. Credit Report Impacts:
- Debt collectors report delinquent accounts to credit bureaus, leading to a significant drop in your credit score for months or even years.
- Clearing a collection debt has benefits, such as stopping collection calls and improving your credit report.
3. Debt Collector Calls:
- Debt collectors aggressively pursue payment, often resulting in constant phone calls and letters.
- It may be necessary to request the cessation of calls in writing, though some collectors may continue to violate regulations.
4. Credit Report Marks:
- Debt collections signify serious delinquency and portray you as a riskier borrower to other creditors.
- The presence of unpaid collections on your credit report can lead to credit application rejections, particularly for major commitments like mortgages.
5. Unfavorable Interest Rates:
- Even if approved for credit, having a collection on your report may necessitate higher interest rates due to increased perceived risk.
- Clearing your balance in full helps avoid expensive finance charges, and some services may require upfront deposits.
6. Job Hunting:
- Some employers check credit reports, and a collection item can hinder job prospects, especially for financial or upper-management roles.
- Refusing permission for a credit check may not enhance your candidacy.
7. Lawsuits:
- Collectors can sue for any debt amount, potentially leading to wage garnishment if a judgment is obtained.
- Ignoring a lawsuit summons is not advisable, and legal advice is crucial when facing debt-related legal actions.
8. Frequently Asked Questions (FAQs):
- Timely payment is crucial to avoid being sued for the debt.
- Debts technically don't disappear but may become time-barred based on the state's statute of limitations.
- Paying off a debt in collections can improve your credit unless the debt is time-barred.
In conclusion, understanding the intricacies of debt collections and their ramifications is essential for making informed financial decisions and safeguarding one's creditworthiness. If you have further questions or seek personalized advice, feel free to ask.
