Understanding Debt Collections: A Comprehensive Guide

In today’s financial landscape, managing debt is a crucial aspect of maintaining a healthy credit score and financial stability. At O1ne Mortgage, we understand the complexities of debt management and are here to help you navigate through it. In this article, we will delve into the types of debt that can go to collections, what happens when a bill goes to collections, and how to avoid having accounts go to collections. If you have any mortgage service needs, feel free to call us at 213-732-3074.

Types of Debt That Can Go to Collections

Debt can come in many forms, and understanding which types can go to collections is essential. Here are some common examples:

• Credit Card Balances: Unpaid credit card bills are one of the most common types of debt that can go to collections.
• Student Loans: If you default on your student loans, they can be sent to collections.
• Auto Loans: Even after a vehicle has been repossessed, if its value is less than the remaining balance on the loan, the debt can go to collections.
• Personal Loans: Unpaid personal loans can also be sent to collections.
• Utility Bills: Unpaid utility bills can be sent to collections after a certain period.
• Bank Fees and Overdrafts: Unpaid bank fees and overdrafts can be sent to collections.
• Fines and Fees Imposed by Courts or Government Agencies: These can also be sent to collections if unpaid.
• Unpaid Tuition: If you have unpaid tuition fees, they can be sent to collections.
• Late Rent Payments: Unpaid rent can be sent to collections.
• Medical Bills: Medical collections of $500 or more may appear on your credit report.

What Happens When a Bill Goes to Collections?

When you fall behind on payments, your creditor may put your account into collections. This typically happens when your payment is 120 to 180 days late, but there’s no set standard for when accounts may go to collections. Here’s what happens:

1. Account Charge-Off: Your creditor may charge off the debt, close your account, and sell the debt to a third-party collection agency.
2. Credit Report Impact: The balance on your charged-off account changes to $0, and a new collection account appears on your credit report.
3. Collection Agency Contact: The collection agency will contact you to collect the debt. You can work with them directly to make arrangements and send payments until your debt is cleared.

Should I Pay Debt That Goes to Collections?

Paying off debt that has gone to collections may be the simplest route to ending the process and moving on. Here are some steps to consider:

• Rule Out Scams: Ensure the debt collector is legitimate before paying any money. Verify their information with your state regulator.
• Confirm the Debt: Under the Fair Debt Collections Practices Act (FDCPA), debt collectors must provide a debt validation letter showing the original creditor and the amount owed.
• Make a Payoff Plan: Your goal is to pay off the debt in collections, either as a lump sum or through a payment plan. If necessary, negotiate to settle the debt for less than what you originally owed.

How Long Do Collections Stay on Your Credit Report?

Paid and unpaid collections stay on your credit report for seven years, starting from the date of your first missed payment that led to collections. A collection account on your credit report is considered a negative entry and will impact your credit score for as long as it appears, though its effect will lessen over time.

Collection Accounts That May Not Affect Your Credit Scores

In some cases, collection accounts may have little or no impact on your credit scores:

• Medical Collections: Medical collections with an initial reported balance of less than $500, paid medical collections, and unpaid medical collections less than one year old no longer appear on consumer credit reports.
• Paid Collections: Paid collection accounts no longer figure into your credit scores for FICO® Scores 9 and 10, as well as VantageScore 3.0 and 4.0.
• Small-Dollar Collections: FICO® Scores 8, 9, and 10 ignore collection accounts when the original amount reported is under $100.

How to Avoid Having Accounts Go to Collections

Avoiding collections is the best way to maintain a healthy credit score. Here are some strategies:

• Set Up Reminders or Automatic Payments: Paying every bill before its due date is crucial. Set reminders or consider automatic payments for recurring bills.
• Check Your Credit Reports Regularly: Regularly checking your credit reports helps you keep tabs on your outstanding debts and payments.
• Reach Out to Your Creditors: If you’re having difficulty covering a bill, contact your creditor to see if you can work out a payment plan.
• Consider Credit Counseling: An accredited credit counselor can help you work out a plan to get caught up on bills and negotiate with creditors on your behalf.
• Be Careful About Cosigning: If you’ve cosigned a loan, the unpaid debts can cause credit problems for you.

The Bottom Line

Collection accounts can have real consequences on your credit. Regularly check your credit reports and dispute any inaccuracies. If you find a collection account, paying it off could eliminate its impact on credit scores calculated using the latest versions of the FICO® Score and VantageScore systems.

At O1ne Mortgage, we are committed to helping you manage your finances effectively. If you have any mortgage service needs, call us at 213-732-3074. Our team of experts is here to assist you every step of the way.