A scary statistic has been recently released by the Urban Institute after they studied and analyzed the credit files of 7 million Americans; more than one third of Americans have debt in collections. Having debt in collections means that the debt an individual owes is so far past due that the account has been closed, placed in collections, and reported to the credit bureau.
What could this mean for you? Well if you are on the Americans delinquent on your payments there are many negative effects that you could soon be experiencing. If you have an account placed in collections, your credit score has the potential to drop substantially. If you have a high credit score then you have the potential to lose more points than if your score were lower. The amount by which your score drops also directly correlates to the amount which is owed. Some scoring models have ways of differentiating between consumers with ongoing debt management problems and those with just minor accounts in collection. For example if you have an account in collections under $100 and have not had previous debt problems then it may show up on your credit report but not affect your credit score. If your score does drop however, this could dampen your financial future because it may cause you to be denied for credit cards and loans.
What should you do if you have an account in collections? Having an account marked with a “collection” status can stay on your credit report for up to seven years unless you negotiate with the collections agency. While negotiating with the company, you should make sure that you stay up to date on your other accounts so that your score can recuperate.