A collection account is an unpaid debt account sent to a collections agency. It is created when a borrower misses enough payments on a debt that the creditor declares the debt in default and seeks the help of a collection agency, whether internal or external, to collect any outstanding money owed.
In most cases, creditors allow borrowers a grace period to pay any delinquent accounts. When the grace period passes without any payment from the borrower, it automatically becomes a collection account.
Creditors also sometimes allow borrowers to restructure their loans in order to make monthly installment amount more regular, as long as the borrower contacts the creditor and passes its requirements. In some cases, collateral is asked in return for restructuring a loan, especially if the loan is already delinquent and in danger of becoming a collection account. In this case, the loan becomes a secure loan.
Borrowers should be very careful about having a collection account attached to their name. A collection account lowers a person’s credit score. In fact, for each collection account reflected on a person’s credit score, it can lower the credit score by as much as 20 to 50 points.
Furthermore, collection agencies are notorious for using very unpleasant methods in order to collect payment for debts, which will create significant stress and hassle in anyone’s life. Note though that according to the law, collection agencies are not allowed to threaten borrowers.
