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What is a collection agency?

Collection agencies include businesses that make money by collecting past-due debts on behalf of their clients, including credit card issuers


If you hear from a collection agency, it’s generally because you’ve fallen behind on payments for a credit card, mortgage, student loan or some other form of debt. Read on to find out what collection agencies do and what rights you’re entitled to when dealing with them.

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An estimated 68 million Americans had delinquent debts in 2019 that were somewhere in the collections process, according to the Urban Institute.

In many cases, collection agencies worked to recover all or part of those past-due debts.

If you hear from a collection agency, it’s generally because you’ve fallen behind on payments for a credit card, mortgage, student loan, auto loan, medical bill, tax bill, utility bill or some other form of debt. A creditor or lender that’s owed this money might seek help from a collection agency to settle the debt or might sell that debt to a collection agency.

See related: How to pay off a debt in collection

What do collection agencies do?

Also known as debt collection agencies or debt collection companies, collection agencies include businesses that make money by collecting past-due debts on behalf of their clients, such as credit card issuers and mortgage lenders. In these situations, a collection agency agrees to pursue a client’s overdue debt in exchange for a flat fee or a percentage of the money it recovers.

Collection agencies also might buy overdue debts from creditors or lenders for less than the amount owed. They then try to recover the full amount so they can make a profit on that debt.

A collection agency normally enters the picture once your debt is at least three months late. The agency can contact you about that debt by phone, mail, email or text message.

What are your rights when dealing with collection agencies?

Designed to protect your rights as a consumer, the federal Fair Debt Collection Practices Act and state laws regulate how collection agencies can go about collecting debt. Here are some of the rules they must follow, according to the FTC:

  • A collection agency can contact you only from 8 a.m. to 9 p.m. unless you give them permission to contact you at other times.
  • A collection agency cannot contact you at work if your employer does not let you take calls at work.
  • A collection agency cannot talk to anyone about your debt except you or your spouse, unless you’ve hired an attorney to represent you. In that case, a collection agency must contact your attorney about your debt. A collection agency can reach out to other people – but normally just once – to get your address, home phone number and employer.
  • Within five days of initially contacting you, a collection agency must send you a written notice that explains how much money you owe, which creditor or lender is owed the money and what you can do if you don’t believe the debt is yours.
  • If you mail a letter asking a collection agency to stop contacting you, the agency can then contact you only if it’s confirming that it’ll stop contacting you or if it’s informing you about a debt-related action (such as filing a lawsuit against you).
  • A collection agency cannot lie to you (like falsely claiming you’ll be arrested if you don’t pay the debt), harass you (like swearing at you over the phone) or engage in unfair practices (like charging interest that you don’t owe).
  • A collection agency cannot seize money from your paycheck unless it obtains a court order to do so.

If you don’t think you owe the debt, the Fair Debt Collection Practices Act enables you to submit a written dispute to the collection agency. After a collection agency first contacts you about a debt, you have 30 days to dispute the debt.

If you do owe the debt, you can try to negotiate with the collection agency on coming up with a payment plan or making a lump-sum payment.

What if you can’t come to an agreement on a debt? You might need to enlist help from a third-party arbitrator to settle the matter.

When you’re unclear about your rights regarding debt collection, contact your state attorney general’s office or seek assistance from a nonprofit credit counseling service. You also might consider hiring an attorney to deal with a collection agency on your behalf.

How does a collection item affect your credit?

One important thing to know about a debt that’s gone to collection is this: You’re legally required to pay a debt that’s been turned over to a collection agency if you truly owe the debt. If you’re in this situation, you’ll pay the debt to the collection agency, not the original creditor or lender (like a credit card issuer).

A debt that’s in the hands of a collection agency may be reported to one, two or all three of the major credit bureaus – Equifax, Experian and TransUnion – and then appear on your credit reports. This negative mark on your credit report might harm your credit score, depending on which credit scoring model’s been used.

An unpaid debt that’s been flagged as going to a collection agency can stay on your credit reports for up to seven years from the date that you initially missed a payment to the creditor or lender.

If you pay the debt, your credit reports should note that it’s been paid. When you pay the debt before the seven-year period ends, it still can show up on your credit reports, but in a more positive way – as a debt that’s been wiped out. Your credit score might not suffer as much if the debt has been reported as paid.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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