What Is A Collection Account? A Beginner’s Guide

6 Min Read
Updated June 3, 2022
Written By
Scott Steinberg
Woman looking pensive at home office desk.

A collection account is a debt account that’s maintained by a collection agency or debt buyer if you fall behind on payments.

It tracks debt that you’ve accrued and have been delinquent on for an extended period of time that the lender has transferred to a third-party debt collection agency.

The sale or transfer of your collection account doesn’t alleviate you from having to pay these debts. The presence of collections on credit reports can have a negative impact on your credit score.

What does it mean to send an account to collections? How can you dispute a collection account? And how do collections influence your credit history? Read on to find out more.

What Does It Mean To Send Your Account To Collections?

A collection account is one with unpaid debt that a lender transfers to a collection agency. The collections agency is a third-party debt collector that works to get the money you may owe.

In most cases, an account becomes a collection account after a few months of a borrower missing their payments. If you fail to pay off your outstanding debts for an extended period of time, these debts may be transferred to a collection agency that will look to get these sums paid.

See What You Qualify For

How The Collection Process Works 

The collections process is designed to maximize collected debt and resolve outstanding unpaid payments. It favors the lender, not the borrower, and typically follows the steps below.

Step 1: Creditor Sends Out A Notice To The Account Holder

The first step in the collections process involves lenders and creditors formally contacting borrowers or account holders to notify them of the unpaid debt. For instance, if you have unpaid balances, a notice will be mailed to you.

As part of these notices, you will be informed that you may be charged late payment fees for outstanding balances. Unpaid debt that goes unresolved following the receipt of one or more notices may be subject to further action.

Step 2: The Creditor Reports Missed Payments To The Credit Bureau 

How do collections influence your credit history? If you fail to resolve outstanding concerns, creditors will report missed payments to credit bureaus, which can cause your credit score to drop. This typically occurs 30 – 60 days after receipt of notice for missed payments is issued. 

Step 3: The Account Holder Is Charged A Penalty APR 

In the case of missed credit card debt payments, the account holder will be charged a penalty APR − typically after two missed payments, or 60 – 90 days after payments were due. For other outstanding forms of debt, various fixed or variable late payment penalty fees may apply.

Step 4: The Creditor Reports A Default On The Account

Should balances still remain unpaid, the creditor will report a default on the account, generally 90 – 120 days after debts are outstanding. 

Step 5: The Creditor Sends the Debt To A Debt Collector

At this point, the creditor will generally hire a debt collections agency to assure borrowers pay any remaining unpaid sums. A debt collector’s role is to help lenders and creditors collect outstanding monies owed to them.

Step 6: The Collector Closes The Account

If debts go unpaid, the collections account will be closed or sold on to a debt buyer. The penalties for having failed to meet your obligations as a borrower will linger on your credit history for years.

Frequently Asked Questions: Collections Account And Your Credit

Do Collections Show Up On Credit Reports?

Yes. A collection account may be reported to credit bureaus, and the data contained within it will then show up on a borrower’s credit report.

Can Collections On Credit Reports Hurt Credit Scores?

Absolutely. Your credit report provides a snapshot of your financial health and habits. Any evidence of unsuccessful handling of money, such as consistently late or skipped payments, can affect a borrower’s credit score.

How Long Do Collections Stay On Your Credit Report?

Collections may be reported by credit bureaus for up to 7 years following the date of your first delinquent payment (aka first reported late payment).

Can A Collections Account Be Removed From A Credit Report And How?

In short, yes, it can, but the procedure isn’t always simple or straightforward. You will have to go through the process of disputing the account.

How Can You Find Out If Your Account Is In Collections?

In order to determine if your account is in collections, you’ll want to check your credit report and credit score regularly.

Why Should You Pay Off Your Collections Account?

Yes, you should. You’ll stave off ongoing penalties and show future lenders that you have the ability to make good on your financial obligations. Be advised, though: Your credit score won’t increase by doing so. Overdue debts won’t be removed from your credit report, just show up as paid vs. unpaid. Debt collections don’t go away immediately because a borrower has to wait until debt collections reach the statute of limitations before they’re removed from their credit report.

How To Remove And Dispute A Collections Account: Step By Step

Wondering how to go about removing a collections account from your credit report or file a dispute surrounding it? Let’s take a closer look.

Step 1: Show Proof Of Collection Reporting Errors

In order to remove a collection from your credit report, there must be proof of an error. A credit card statement or a bill showing that the debt was paid are standard ways to show proof. 

Step 2: Write And Send A Dispute Letter 

Next, you’ll want to send a written dispute letter to your credit bureau, creditor and the debt collections agency so you have written proof of communications that can be tracked.

Step 3: Get A Copy Of The Dispute Letter

Keep a copy of the dispute letter that you’ve filed in case you need to establish a timeline of activity.

Step 4: Wait For Verification

By federal law, debt collectors must stop contacting you until they verify the debt in writing. Verification should list the amount and date of the owed debt as well as the creditor’s contact information. Credit bureaus have 30 days from receiving the letter to investigate a borrower’s claim and respond to them.

The Bottom Line

Keeping in mind the potential detrimental impact that a collections account can have on your credit history and credit score, it’s important to stay on top of your payments. To avoid having your debts go unpaid and transferred to a collection agency, you can contact your lenders or creditors to see if they can arrange a payment plan if you’re at risk of falling behind.

If your account has already been sent to collections, you can try to negotiate a debt settlement. It pays to stay timely and up to date on debt obligations. If you need help managing your debts, cash-out refinances can help you stay financially solvent.

View Your Refinancing Options

See recommended refinance options and customize them to fit your budget.


Recommended For You