What is a collection account?
How the collection process works
The collection process is designed to maximize debt collected and settle outstanding debts. It favors the lender, not the borrower, and generally follows the steps below.
Step 1: Creditor sends notice to account holder
The first step in the collection process involves lenders and creditors formally contacting borrowers or account holders to notify them of the outstanding debt. For example, if you have outstanding balances, a notice will be mailed to you.
As part of these notices, you will be informed that you may be charged late payment fees for unpaid balances. An outstanding debt that is not resolved after receipt of one or more notices may be subject to further action.
Step 2: Creditor reports missed payments to credit bureau
How do collections affect your credit history? If you fail to resolve outstanding issues, creditors will report missed payments to the credit bureaus, which can cause your credit score to drop. This usually happens 30-60 days after receiving the notice of missed payment.
Step 3: Account holder is charged an APR penalty
In the case of missed credit card debt payments, the account holder will be charged an APR penalty – usually after two missed payments, or 60-90 days after payments are due. For other forms of outstanding amounts, various fixed or variable late payment penalties may apply.
Step 4: The creditor reports a default on the account
If the balances remain unpaid, the creditor will report a default on the account, usually 90 to 120 days after the debts are unpaid.
Step 5: Creditor Sends Debt to Collection Agent
At this point, the creditor will usually engage a debt collection agency to ensure that the borrowers pay any remaining outstanding amounts. The role of a collection agent is to help lenders and creditors collect money owed to them.
Step 6: The collector closes the account
If the debts remain unpaid, the collection account will be closed or sold to a debt buyer. Penalties for defaulting on your obligations as a borrower will linger on your credit history for years.