Collection costs are any fees associated with the process of a lender using a third party (a collection agency) to collect a debt. In most scenarios, the borrower will be responsible for taking care of these collection costs.
Below you will find a breakdown of the different fees and expenses that can make up collection costs, along with helpful information on keeping a credit account in good standing.
How Much Are Collection Costs?
If you’ve ever had a loan or credit card, it’s important to know what a debt collector is and how it works.
Generally, the fees for collecting a debt will range from 25% to 50% of the loan’s value. Unfortunately, when an account goes to collections, you will not get to choose the agency. And so, whatever resources an agency decides to use, that is what you will have to pay. These costs are in addition to the principal amount and any interest rates.
What Makes up These Costs?
You may be curious about what these collection costs entail, especially if you have to pay them. Here are a few different expenses that a collection agency will bill as a collection cost:
Employee Costs
Just like a lender, a collection agency is a full-scale business. And that means paying employees.
For example, an agency will need to pay the employee in charge of updating and monitoring your case. While at the same time paying other team members to make phone calls to collect a debt with other default accounts.
Postage Expenses
Sometimes it can take years to get a hold of someone who owes a debt. During that time, agencies will go through resources like paper, ink, and postage. Over time these costs can add up significantly. And so, collection costs are also used to cover various postage expenses.
The Fees of Requiring Credit Reports
This pull from various credit reporting agencies can be a part of getting information on the borrower. Pulling credit reports also costs money and makes up a portion of collection fees.
Employee Training on Laws and Procedures
With lending and credit, there are a ton of laws in place to protect every party involved. There are certain things that collection agencies cannot do, such as threatening a borrower. This legal training is crucial to the successful operation of a business and protecting consumers.
Tracking Down an Address, Phone Number, Assets, and Other Important Information
Sometimes a credit agency will use a third party to get personal information.
What Happens if I Do Not Pay Back a Collection Agency?
Collection agencies will try to work with you to make payments, whatever that minimum may be. You can start as one small payment a month to keep repayment on track. However, if you stop making payments, these agencies have the right to take you to court to get those funds.
A collection agency will add any legal payments to collection costs, including lawyer fees and court costs. Therefore, it will be in your best interest to continue repayment with a credit agency, even if it may seem daunting at first.
How Can I Keep My Credit Accounts in Good Standing?
The best way to avoid the loopholes that can come with a collections agency is to keep your credit accounts in good standing. Making payments on time prevents having to deal with collections in the first place.
If you are having trouble repaying a debt, talk to your lender. Most lenders will work with you and your finances, especially if you have a good payment history with them.
Sometimes it’s possible that collections can show up on your credit report mistakenly. When this happens it’s crucial to learn how to correct your credit report without going crazy.
Learn About Good Financial Habits Before Taking out a Loan or Using a Credit Card
One of the most important things you can do before signing up for a credit line is to learn the basics of successfully managing debt. The following practices are strategies and tools people use to keep their debt on track:
- Budgeting — Creating a budget involves tracking your income and expenses. It can help you stay on track for goals like debt repayment. Creating a budget can be simple. Apps and websites can help you start with an annual, monthly, or a budget for each pay period.
- Creating Emergency Savings Funds— creating a savings fund of 3-6 months of expenses can help prevent the need to borrow from credit cards or loans.
- Paying off Debt Strategically—several strategies can work well for debt repayment. For example, the basics are the snowball/avalanche method, paying more than the minimum due each month, or tackling the highest interest rate. Research these and other debt repayment strategies and find the one that works best for you.
- Never Borrow More Than You Need—overspending and using money through credit can be easily done without notice. An excellent way to curb overspending is to pay off loans or credit cards right away.
- Seek Help—Many Americans are facing a debt crisis, especially young people. Nonprofit organizations and financial advisors are a few places that can provide resources for those who need help.
Collection costs are the expenses that collection agencies incur while attempting to collect a debt. With most loans or lines of credit, when you sign up to receive the funds, you also sign up to take on these costs if they occur with your credit account. These costs can occur for any number of loans or financial products, from mortgages to quick cash loans online.