what happens when you're sent to collectionsCredit report blemishes are a big problem for Americans. While the types of derogatory items on your credit reports can differ — and some may be errors — one thing you may spot on your credit reports is a collection account. According to the Consumer Financial Protection Bureau, over 70 million American consumers — that’s one in three people — are contacted yearly by debt collectors regarding payments for collection accounts, while Urban Institute’s 2014 Delinquent Debt in America found that 35% of American adults have accounts currently in collections, which means if you or someone you know has an account in collections, you’re in good company. Given the severity that collection accounts can have on your credit, these are frightening facts. To help you understand the impact a collection account has on your credit, we breakdown the collections basics you need to know.

What does collections mean?

When someone’s debt is taken to collections, it means the original collector of the payments has handed over the responsibility of managing the unpaid balance to a debt collection agency. This is far from the only change though, as having an account in collections is designated on your credit reports as a delinquency and derogatory mark, which means even after you pay off the balance due, this designation will remain on your credit reports for up to seven years.

Many people are aware that credit card issuers and other lenders can send people to collections, but this right additionally extends to nearly any service Americans pay bills for – like utilities, cell phone service or medical expenses, for example. Because of this, the exact amount of time it takes for an account to land in collections can vary significantly. Some services and companies wait for several failed monthly payments before sending customers’ accounts to collections, while others might threaten to do so at the first sign of untimely payments. In most cases, individuals will be initially marked as delinquent and warned of the delinquency, rather than immediately having their accounts sent to collections. Some companies and services might provide about a one to two month grace period before the delinquency is either reported to credit bureaus or the account is sent to collections. Since different services and businesses have various rules for delinquent accounts, it’s best to check with the service or business about its policy.

How do collection accounts affect your credit?

As stated above, being sent to collections shows up on your credit reports as a derogatory mark which significantly hurts your credit. Even paying off the charge is no guarantee that the mark will be removed from your reports before seven years. Still, paying off the delinquent balance is the best option if possible, as some credit scoring models (but not all) do take that into account, and it makes you look somewhat better in the eyes of future potential lenders.

Similar to other derogatory marks, the effects of a collections notification fade with time, even if it’s not paid off. Unfortunately, though, while the debt might eventually leave your credit report, it’s entirely possible for debt collectors to continue to ask for payments. Legally you cannot be asked for payments or sued by a collections agency after your state’s statute of limitations has passed. This time limit varies from state to state, so make sure you research your state’s rules around debt collections before you agree to make any payments with a collections agency.

How can I avoid collections?

The easiest way to avoid collections is to make sure you pay all of your bills on time and in full (if possible). If you ever find yourself in a situation where you can’t afford to pay your bills, be sure to reach out to the creditor, business or service provider to let them know. While a creditor may not be willing to set up a payment plan with you, businesses or service providers may be more willing to work with you to come up with a way of paying it off that you can afford. It should be noted that if you find yourself struggling to pay off credit card debt, you might want to consider consolidating that debt into a personal loan or balance transfer credit card.

What can you do if your account is sent to collections?

Being sent to collections, even if through a creditor’s error or by a disingenuous debt collector can be a demoralizing experience. However it’s very important that you react calmly, but quickly, to the situation by considering the following:

1. Know your rights. As mentioned in the previous section, you have rights with regard to debt collection. While debt collectors are obligated to do everything in their power to get their payment from you, they still have to respect the law. That said, they may not always go out of their way to make sure you also know the laws. As such, before you get in contact with any collections agency, you’ll want to make sure you know how debt collectors are allowed to contact you as well as the statute of limitations in your state, or how long debt collectors can legally ask for payment. Be aware that even after the statute of limitations on the debt passes, collectors can still ask for their money, they just can’t legally threaten to sue you any longer. Consumers also have other formal protections at their disposal, like writing a cease and desist letter to collectors, preventing them from legally asking again about the owed money (until the owed balance switches hands to a new collector). The Consumer Financial Protection Bureau has a lot of information that you may find helpful.

2. If you think it’s a mistake, do some research. While there are no reported statistics about how common collection errors are, it’s not extremely rare for the wrong accounts to sometimes end up in collections. This is especially likely when an account that should have been closed out wasn’t properly handled and the account holder has moved addresses. If you feel this collection debt is a mistake, do some research to confirm its legitimacy. While this may take some time, as you’ll have to contact the business or service that the debt originated, it’s likely worth the headache, as you can confirm whether or not you truly owe this money. Of course, you’ll need to be honest with yourself — if you find that you’re 100% responsible for the amount that’s due, then you should speak to and negotiate with the debt collector.

3. Don’t avoid communications with debt collectors. Ignoring the calls of legitimate debt collectors is a surefire way to dig yourself deeper into debt. Even if you can’t pay, you should acknowledge your debt and at least try to work out a payment plan with your debt collector. Avoiding them could result in your wages and tax returns being garnished, or even a lawsuit, which would be another severe derogatory mark on your credit.

For more information about credit payments and other credit-related topics, keep reading our credit report monitoring blog.