Credit Card Debt Collection: What Is It and How Does It Work?

If you fall significantly behind on your credit card payments, your account may get sent to collections. Credit card debt collection is the process where creditors or third-party collection agencies pursue repayment of significantly overdue credit card balances, typically 120 days to 180 days late.

Some credit card issuers have in-house collection departments, but often they will close your account and assign or sell your debt to a third-party collection agency. This agency will then contact you to try to collect on the debt. Here’s a closer look at what happens when credit card debt goes to collections.

What Are Credit Card Collections?

Credit card collections is the process lenders and third-party agencies use to recover unpaid debt.

If you’re familiar with using a credit card, you’ll know that card issuers allow you to make purchases with the promise of eventual repayment. But if you don’t make even the credit card minimum payment for many months in a row, the credit card company may eventually send your debt to collections in an effort to recoup the money you owe.

When Are You at Risk of Credit Card Debt Collection?

While there is no standard timeline, credit card debt typically moves to collections after 120 to 180 days of nonpayment.

However, the warning signs often appear much earlier — most notably when a cardholder can only manage the minimum monthly payment. Because interest rates now average over 20% and typically compound daily, balances can become unmanageable fast. While recent proposals aim to cap credit card interest rates, a steadily climbing balance remains a clear indicator of financial distress.

💡 Quick Tip: Wherever you stand on the proposed Trump credit card interest cap, one of the best strategies you can use to pay down high-interest credit card debt is to secure a lower interest rate. A SoFi personal loan for credit card debt can provide a cheaper, faster, and predictable way to pay down debt.

How Do Credit Card Collections Work?

Credit card debt collection results from not paying your credit card bills. The best way to use credit cards is to always pay the full statement balance by the payment due date. If you’re unable to do that, you’ll want to at least make the credit card minimum payment to keep your account in good standing and avoid late fees.

If you don’t make any payments toward your credit card balance for around four to six months, the credit card company may start the credit card collections process. At this point, a third-party debt collector may assume responsibility for trying to get you to repay what you owe, relying on the contact information the credit card company has on file to get in touch.

Credit Card Debt Collections Process

Credit card companies will typically begin the credit card debt collections process by attempting to contact you directly to pay off the debt. If you haven’t made any credit card payments recently, the bank will likely reach out via email or certified letter. If you still don’t make any payments or arrange for a payment plan within 30 to 90 days, they’ll likely send the debt to collectors.

Many card issuers do not have the staff or business model to engage in a long-term credit card collection process. That’s why they will often hire a third-party company to do the actual debt collection. In many cases, they will simply sell the debt to a collection company for less than it’s worth. Either way, the collection agency will then try to collect on the debt. There are currently over 5,000 third-party debt collection companies in the U.S.

Features of Credit Card Debt Collections

When debt goes to collections, a collector will typically contact you via phone, email, or mail to recover the debt. They must abide by the Fair Debt Collection Practices Act (FDCPA), which prohibits them from contacting you before 8 a.m. or after 9 p.m, contacting you by email or text message if you ask them to stop, or contact you at work if you tell them not to.

In addition, a debt collector must give you “validation information” about the debt either when they first communicate with you or within five days of the first contact. By law, they must provide the following details:

•   The collector’s name and mailing address

•   The name of the original creditor you owe

•   How much money you owe, written out to include interest, fees, payments, and credits

•   Steps to take if you don’t think it’s your debt

If you need help understanding your rights or how to handle credit card debt in collections, you might consider working with a nonprofit credit counseling service.

What Is a Collection Lawsuit?

If debt collectors are not successful in using phone calls, letters, or emails to collect on a debt, the next step is often a lawsuit. A collection lawsuit is a civil legal action filed by a creditor against a debtor to recover unpaid, delinquent, or defaulted debt. A court judgment in their favor can lead to wage garnishment, bank account freezes, or property liens.

However, debt collectors cannot sue you for “old” debt if it has passed the legal time limit, known as the statute of limitations. The statute of limitations on consumer debt can range anywhere from two to 20 years, depending on the state. The timeline may start on the date you made the last payment or the first missed payment — this also varies by state.

Once the statute of limitation expires, the debt is considered “time-barred” and collectors no longer have the legal right to take you to court.

Responding to a Collection Lawsuit: What to Know

It’s important to respond to a collection lawsuit promptly, as ignoring the summons can result in an automatic loss (default judgment). You typically need to respond in writing by a date specified in the court papers, either personally or through your attorney.

You may also need to show up in court, even if you don’t believe you owe the debt. By showing up to court, the debt collector will have to prove that you owe the debt, the amount is correct, and they have the legal right to sue you to collect on the debt. If they can’t, you may have the debt vacated. You may also be able to have the debt discharged if it’s past your state’s statute of limitations.

If you’re unsure how to handle a debt collection lawsuit, you may want to consult a debt relief lawyer.

What Happens If You Don’t Respond to a Collection Lawsuit?

If you don’t respond to a collection lawsuit, it’s possible that the judge will issue a default judgment against you. A default judgment means that the plaintiff (the debt collector) automatically wins, since the defendant (you) did not respond to the lawsuit. In that case, the debt collector now has the legal right to garnish your wages and/or attempt to go after the money in any of your bank accounts.

How a Debt in Collection Affects Your Credit

Once a credit card issuer sends your debt to collections, they will typically close your account and the collection is usually reported as a separate account on your credit report, where it can stay for up to seven years.

A collection account on your credit report is considered a negative entry and can negatively impact your scores, though its impact diminishes over time.

If you pay the debt in collection, the collector may update your account status to “paid” on your credit report. While paid collections can still impact your credit scores, some newer scoring models do not consider paid collection accounts when calculating your score.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Guide to Dealing With Credit Card Debt in Collection

If you have credit card debt in collections, it’s important to immediately request a debt validation letter to confirm the debt is yours and accurate. It’s also a good idea to check your state’s statute of limitations for suing on debt, and keep in mind that paying or promising to pay a time-barred debt can reset this clock.

You can check the validity of the debt by looking at your credit reports. If the debt is yours and it’s not time-barred, you might offer to pay a reduced, lump-sum amount in exchange for marking the debt “settled in full.” You’ll want to be sure to get any agreements in writing before making a payment.

Taking Charge of Your Finances

If you’re worrying about credit card debt collections, you may feel like your finances have spun out of your control. Here are some tips to take charge once again:

•   Only spend what you can afford to pay off: One of the best tips for using a credit card responsibly is to avoid making purchases that you won’t be able to pay off each month. This will stop your spending from spiraling into debt.

•   Always try to pay off your credit card in full: While not always easy to do, paying your full statement amount each month allows you to avoid paying interest on your purchases and accumulating debt and can positively impact your credit file.

•   Address any debt head on: If you find yourself in the position of having credit card debt, one of the best things you can do is acknowledge your situation and make a plan to pay off your credit card bill. Start a budget, cut expenses if needed, and use any monthly surplus amount to pay down your debt. It’s also smart to stop spending on your credit card until you’ve reduced or eliminated any outstanding balance.

Recommended: When Are Credit Card Payments Due?

The Takeaway

If you miss making a credit card payment for many months in a row, your card issuer may send you debt to collections. Often, this means that your account will be managed by a third-party agency. This can significantly harm your credit for up to seven years and may even result in a collection lawsuit. Understanding your rights under the FDCPA and proactively addressing debt issues (before they go to collections) can help you regain control of your financial health.

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FAQ

What happens when credit card debt goes to collections?

When credit card debt goes to collections, the creditor or a third-party collection agency will contact you to try and recover the overdue balance. This may happen after you’ve missed payments for 120 to 180 days. The collector must provide validation information about the debt and abide by the Fair Debt Collection Practices Act (FDCPA). The collection account will appear on your credit report for up to seven years, and can negatively affect your credit scores. If a collector cannot recoup what’s owed, they may file a collection lawsuit, which could result in a court judgment allowing for wage garnishment or bank account levies.

Can a debt collector force me to pay?

A debt collector cannot legally force you to pay a debt. They are permitted to contact you to request payment, and, if the debt is still within the statute of limitations, they can file a lawsuit. If they win the lawsuit and obtain a court judgment, that judgment can legally allow them to garnish your wages or freeze your bank accounts to recover the debt. However, they must always follow the rules of the Fair Debt Collection Practices Act (FDCPA).

How long can credit card debt be collected?

The length of time a credit card debt can be collected depends on your state’s statute of limitations, which dictates how long a creditor has to sue you. This period can range from two to 20 years, typically starting from the date of your last payment or first missed payment. Once the statute of limitations expires, a collector can no longer take legal action against you, though they may still attempt to collect the debt.

Do debt collections affect your credit score?

A debt in collections can negatively affect your credit and remains on your credit report for up to seven years. Since payment history is the most significant factor in credit scoring, a collection account is a serious negative mark. Paying the debt may help, as some modern scoring models disregard paid collection accounts.

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Photo credit: iStock/courtneyk

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This article is not intended to be legal advice. Please consult an attorney for advice.

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