Are you one of the estimated 35% of people with credit files that have a debt currently in collections? Your debt is probably in collections for a good reason – perhaps you recently lost a job, acquired unexpected expenses, or simply had trouble controlling your spending.
If your debt is in collections, your original debtor has given up and sold your debt to debt collectors to recoup some of their losses. Debt collectors can be particularly persistent and unpleasant, but ignoring them is usually unwise. Here are a few reasons why.
- Long-Lasting Effects – The unpaid debt will stay for seven years on your credit score. At that point, the debt will be dropped off your credit report and your score will improve – but can you really afford seven years of reduced credit capability? If you answered yes, read the following sections very carefully.
- Difficulty in Getting New Credit – Unpaid debt in collections will drop your credit score, which in turn causes a series of problems. You are unlikely to be able to open new credit accounts, and if you do, you will pay a higher interest rate for the risk you represent. Unpaid debt will also seriously hamper your ability to get a mortgage loan.
You may think if you cannot pay your bills, you should not be applying for new credit at all. It is true you need to get your spending under control first – however, once you do, you need to make debt payment a high priority. Otherwise, the long-term effect on your credit score will hinder you from acquiring more positive forms of debt, such as an equity-building mortgage.
- Job Applications – You may not see the connection between unpaid debt and job applications, but the common thread is trust. A potential employer is less likely to hire you if they are not sure they can trust you to act responsibly.
You could be rejected outright for a job, or have to convince a potential employer that you had a good reason for incurring the debt and intend to repay it at the first opportunity. Paying the debt does not drop it off your credit report, but it does make it easier to explain to potential employers and new creditors.
- Legal Action – Just because a debt is relatively small does not mean a creditor will not sue you, or at least threaten to do so. If your state’s statute of limitations on the debt has not passed, the current owner of the debt has the right to sue you. Your wages could be garnished if you lose the lawsuit – and even if you win, you lose, because of the expense of legal fees.
One caveat: it is important to make sure you are paying the correct holder of the debt and that the debt in question is actually yours, since the group contacting you is usually not your original creditor. Make the collection agency send you a validation letter regarding the debt in question.
Ultimately, there is one overriding reason that you should pay your debt – it is the right thing to do. Suppose your employers were going through hard times and decided they cannot afford to pay you for the next month. You might put up with it for some time, but you would expect to be paid in full eventually and probably expect a little extra for helping them through bad times.
You would not simply put up with non-payment for your services without a fight – and neither will your creditors.
If you want to settle outstanding debts for less than what you owe, try our debt settlement tool.