Having an account sent to a collection agency is a major hit in terms of your everyday money management and your confidence in your financial health. Where a collections account hits the hardest, though, is on your credit report. Having an account placed in collection status can cripple your credit score by itself, both now and in the long-term future.
If you fail to make a payment to one of your creditors by the due date, you'll be subject to calls from the creditor as well as a late fee. If you fail to make your payment for a lengthy period of time, usually 180 days, your creditor may feel as though it needs outside help in getting its money. Collections agencies are that outside help, and having one of your accounts sent to one can mean big trouble for your financial future.
Collections Agency Procedure
When a collections agency is brought in to help a company recover its money, it will initially contact you to state its intention to collect a debt. If you feel the debt is not yours, you have 30 days to notify the agency that the debt is not valid. If the debt is in fact valid, the agency has the right to inform the credit bureaus about your collection status. If you make arrangements to pay the collections agency right away, this may convince the business not to report you to the credit bureaus.
Impact on Credit
If one of your accounts is sent to collections, your credit report will show this information for the next seven years, no matter how low the balance is on the account in question. The impact of a collections account is huge; if your credit score is very high, you could see your score decrease by as much as 100 points if one of your accounts goes into collections. Worse, even if you pay the account, it doesn't change anything, because the fact that the account was sent to collections is still reported.
Rebounding From Collections Activity
Having an account sent to collections is tough, but it isn't a death sentence for your financial future. Though your credit report will show an ugly mark for the next seven years, its impact will diminish over time, particularly if your subsequent credit activity is blemish-free. Eventually, the good things you do with your credit will outweigh your past activity. You can also try asking the collections agency in question if it will consider a pay-for-delete, in which you pay the outstanding balance of the account in exchange for the item being removed from your credit report. However, not all agencies honor these agreements, so don't count on the removal of your collections account being a sure thing.