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What is a Collections Account and How Does it Affects Your Credit Rating

Bill Past DueBorrowers have an unfortunate tendency to find out about the negative aspects of their credit bureaus during the credit application itself, when it’s already too late to clean up the situation before it gets recognized by the bank. Collections accounts are the most difficult of these negative aspects to keep track of, correct, or even recognize in the first place, because of the way in which they are sometimes simply reported to the credit bureau without even contacting the customer in the first place. In order to be sure that these sorts of accounts don’t interfere with our ability to secure funds from a bank in the future, it is important to understand what it is that a collections account it, how it got on our credit bureau, and how it is that it can be removed as neatly as possible.

A collections account is a debt or obligation that belongs to a consumer, but has been written off to a third party company by the issuing institution as a result of poor repayment history. This means that a collections account represents a debt that was not properly paid out, and is considered to be in default. These accounts have a very negative impact on the credit bureau because they show that a borrower was unable to meet the entirety of one of their obligations. Worse yet, if the account is still outstanding with the collections company, it shows that the customer is still refusing to meet the obligation.

Seeing such an account on a credit bureau will often put off most lending institutions, as it represents a risk that the customer choose to ignore their obligation with the new debts being taken out as well. As such, borrowers need to be able to keep track of their payment obligations to not only ensure that their accounts do not accidentally wind up in collections, and if they do get written off, take efforts to pay out the outstanding amounts so as to show future lenders that the write-off was an isolated situation.

The easiest way to prevent the occurrence of a collections write-off is to stay in contact with all of the companies to which you owe some sort of obligation. This can be as simple as keeping your phone number up to date with these companies, so that they can get in touch when they are concerned about the integrity of the contract. Sometimes a simple phone conversation is enough to work out an agreement that will keep a debt out of collections, because it assures the lender that you are still engaged with the transaction, and are still willing to make repayments. Alternatively, getting in touch with lenders before an obligation starts becoming a problem can sometimes make a difference as well, because of the way in which it allows the lender to take measures in advance to accommodate a changing payment schedule, or even allow for a deferred payment (ie. Skipped payment).

The final way for a borrower to ensure that a collections account on their credit bureau does as little damage as possible is to follow up on their own credit bureau reports regularly. This can be accomplished for free by contacting any credit reporting company, and requesting access to a credit report once per year. By reviewing this document, a borrower can keep track of any obligations that are outstanding, their relevant repayment history, and most importantly, to whom these obligations are owed.

More often than not, a borrower will have difficulty figuring out who it is they need to pay in order to get a collections account off of their profile. By simply looking at their credit bureau, a borrower will be able to see exactly who it is they owe money to, and then follow up on the payment directly. In repaying out a collections account before applying for more debts, the borrower is greatly improving the integrity of their application by showing a willingness to repay debts over the long term.

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