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You may have had a debt sent to collections or you may not have, but either way, chances are you know it’s not a great thing to happen. But when are you at risk of having your debt sent to collections, and how does it affect your credit?

The good news is that if you’re making your minimum monthly payments on your bills and debts, you’re probably not at risk of having an account sent to collections. Once you fall delinquent or miss a payment or two, however, your risk for having a collections account pop up increases.

What can you do about debts that are in collections? Continue reading to get the answers you need for dealing with your collections debt and improving your credit as soon as possible.

What is a debt collection?

When you don’t pay a bill by the due date, it’s often reported to the credit bureaus as being late. If it’s late again the next month, the same thing happens. The lender will try to collect it for a period of time before finally deciding they would rather write off their loss and sell it to a debt collector — and that’s what is known as collections. This generally happens when the bill has been unpaid for 180 days or more. The debt doesn’t go away when the original lender sells it, however. The original creditor writes it off of their books, but the debt transfers hands to the debt collector. You still are responsible for paying it.

When this happens, rather than getting notices from, say, your former cell phone service provider, you’ll be getting them from a debt collector. They have paid money, usually pennies on the dollar, for the debt, and they will do their best to collect it. That doesn’t mean they can use illegal or unfair tactics to get the money, though. They must abide by the Fair Debt Collection Practices Act while trying to collect on the debt, and you can report them for being in violation of it.

What does it mean for my credit?

Accounts that are in collections will have a negative impact on your credit scores. That is because 35% of your credit scores is from your payment history. Making payments on time and in full is important for keeping your scores high.

A debt goes into collections because it is unpaid. Your credit scores are based on an algorithm, so it’s impossible to calculate exactly how much a single late payment affects them, versus one that goes into collections. It’s also difficult to know how quickly your credit scores will go back up. Once you have a debt in collections, do the following to ensure your credit doesn’t drop further:

  • Make the minimum payments: Paying this amount will keep your debt in good standing so you don’t get any more dings for missing payments.
  • Make payments on time: It’s easy to slip up and miss a payment. To prevent a missed payment, set up a reminder a week or two before it is due so you have time to send a certified check or money order. Doing it this way prevents electronic errors and gives you physical proof that you submitted your payment on time.
  • Create a plan to stay on top of other debts: While it’s important to focus on your collections debt, you also want to stay up-to-date on other payments. Create a financial plan that lowers your spending and equally distributes payments to other credit cards or loans.

What to do if your account is sent to collections

Once a debt goes to collections and is sold to a third party debt collection agency, they will contact you by phone or mail. Before you pay the debt, you need to:

  1. Find out how much they want to charge you.
  2. Negotiate with them on the amount you’ll pay. They may add late fees plus interest. You can probably settle the debt for a fraction of the original amount.
  3. Get the agreed-upon amount in writing, along with their acknowledgment that this is the full payment for the debt.
  4. Pay the amount by certified check or money order. Do not give debt collectors electronic access to your bank account. While online transfers are great for a lot of payments, this is one time you shouldn’t use this method. Sending a certified check or money order gives you proof of payment, and it ensures that they have no access to your bank account.

How to dispute an inaccurate collections account

There are times when you may find an incorrect collections account on your credit reports. This is generally due to human error during the data entry process. Names may have gotten mixed up or numbers transposed, or the collections account may be too old to legally report to credit bureaus. Although it’s frustrating, it’s possible to get it removed.

To dispute an inaccurate collections amount, write a letter to the bureau that has the mistake listed. The Federal Trade Commission has a sample letter you can use. In your dispute letter, include:

  1. Your name, address, phone number and Social Security number.
  2. The item that you’re disputing.
  3. The reason for the dispute.
  4. A clear request to remove the item.
  5. A copy of the report with the dispute highlighted.

While you can submit a dispute by phone or online, mail is better. Send the dispute by certified mail using the return receipt requested service so you have a record of the date the process began. The Equifax, Experian and Transunion websites also have instructions on how to file disputes. The credit bureau will have 30 days to investigate and provide you with a written response regarding their decision.

When it comes to having a debt in collections, it’s best to be proactive and take care of it by paying it or settling for a lower amount. Your credit will drop because of this situation, but by making on time payments for at least the minimum amounts on your other debts, you can maintain and improve your credit scores going forward. In the unfortunate event that someone else’s debt is on your credit reports, you don’t need to worry. Getting it removed is possible and, once done, your credit will improve.