A collection agency is a business that pursues payments of debts owed by individuals or businesses. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed.
There are many types of collection agencies. First-party agencies are often subsidiaries of the original company the debt is owed to. Third-party agencies are separate companies contracted by a company to collect debts on their behalf for a fee. Debt Buyers purchase the debt at a percentage of its value, then attempt to collect it. Each State has its own rules and regulations regarding them.
Some collection agencies are departments or subsidiaries of the company that owns the original debt. First-party agencies typically get involved earlier in the debt collection process and have a greater incentive to try to maintain a constructive customer relationship. Because they are a part of the original creditor, first-party agencies may not be subject to legislation that governs third-party collection agencies.
These agencies are called “first-party” because they are part of the first party to the contract (i.e. the creditor). The second party is the consumer (or debtor). Typically, first-party agencies try to collect debts for several months before passing it to a third-party agency or selling the debt and writing off most of its value.
A collection agency is a third-party agency, called such because such agencies were not a party to the original contract. The creditor assigns accounts directly to such an agency on a contingency-fee basis, which usually initially costs nothing to the creditor or merchant, except for the cost of communications. This however is dependent on the individual service level agreement (SLA) that exists between the creditor and the collection agency. The agency takes a percentage of debts successfully collected; sometimes known in the industry as the “Pot Fee” or potential fee upon successful collection. This does not necessarily have to be upon collection of the full balance; very often this fee must be paid by the creditor if they cancel collection efforts before the debt is collected. The collection agency makes money only if money is collected from the debtor (often known as a “No Collection – No Fee” basis). Depending on the type of debt, the age of the account and how many attempts have already been made to collect on it, the fee could range from 10% to 50% (though more typically the fee is 25% to 40%).
Some debt purchasers who purchase sizable portfolios will utilize a Master Servicer to assist in managing their portfolios (often ranging in thousands of files) across multiple collection agencies. Given the time-sensitive nature of these assets, many in the Accounts Receivable Management (ARM) industry believe there is a competitive advantage in utilizing this technique as it gives the debt purchaser more control and flexibility to maximize collections. Master Servicing fees may range from 4% to 6% of gross collections in addition to collection agency fees.
Some agencies offer a flat fee “pre-collection” or “soft collection” service. The service sends a series of increasingly urgent letters, usually ten days apart instructing debtors to pay the amount owed directly to the creditor or risk a collection action and negative credit report. Depending on the terms of the SLA, these accounts may revert to “hard collection” status at the agency’s regular rates if the debtor does not respond. In many states there is legislation to limit harassment and practices deemed unfair, for example limiting the hours during which the agency may telephone the debtor, prohibiting communication of the debt to a third party, prohibiting false, deceptive or misleading representations, and prohibiting threats, as distinct from notice of planned and not illegal steps. . In the United States, consumer third-party agencies are subject to the federal Fair Debt Collection Practices Act of 1977 (FDCPA), is administered by the Federal Trade Commission or FTC.
The degree to which a collection hurts your credit score is directly correlated with how high your credit score is when the collection agency reports the debt. The higher your score, the more points you will lose.
In addition, the amount of damage to your credit score is also determined by the collection amount, or how much you owe. Some scoring models now have a way of differentiating between consumers who have clear debt management problems and those who only have minor accounts in collections. For example, if the original debt you owed was less than $100, the resulting account in collections may show up on your credit report but it won’t hurt your credit score.
The resulting credit score drop from having an account in collections will directly impact your future financial plans, as it may cause you to be denied for credit cards and loans, especially if the collection is recent or remains unpaid (or both).
If it is not your debt, you are not required to pay it and creditors cannot list it on your report. In addition, if the seven-year period is up and the “collection” status still remains on your report or if you are still being contacted about a very old debt, it is possible that the account has been sold and resold a number of times and you should dispute the debt from your credit report. There is no statute of limitations on how long a collection effort can last, but some states do have a statute of limitations on how long a creditor or collector has to take legal action with your debt.
When paying off a collection, you should always ask for a deletion letter to have the complete account deleted from all major credit reporting agencies. The reason for this is because the status of any settlement may result in a drop of your credit scores.
Collection Agencies may also sell uncollected debt to 3rd party collection agencies and have them also report the debt on your credit reports again showing the same account multiple times with a different collection agency name on your credit reports. Each time a collection appears on your credit may drop your credit scores.
In any effort of working on fixing and rebuilding your credit, always keep your eyes wide open to what is exactly being reported on your credit reports, especially when you are disputing the information reported. I.e.: make sure the dates are the same from when it 1st appeared on your credit after you have disputed your accounts. Also, make sure the balances are the same as well. After careful review after any disputes, the creditor may change the dates and have them appear as brand new collection accounts which may adversely affect your credit scores again.
If you don’t know how your collections are being reported or you are being harassed by a collector, please don’t hesitate to call EZ Choice Financial Corp. @ 888-349-6690. We will give you a free consultation on your credit standing to have you understand exactly how your credit is affecting your credit scores and what you can do to help increase your credit scores.