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Debt Consolidation Loans: What You Need to Know

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Keeping track of your finances can be difficult, especially when you have several payments going in several different directions. If that sounds familiar, a debt consolidation loan could help. 

Our guide will break down what you need to know about debt consolidation loans and help you decide whether or not they’re the best option for you.

What are Debt Consolidation Loans?

Debt consolidation loans are used to combine multiple debts, such as credit cards, high-interest loans and medical bills, into an account with one monthly payment and lender. Debt consolidation loans are a type of personal loan

Applying for and receiving a debt consolidation loan is a multi-step process that requires you to choose your loan terms, finalize your application and repay the loan.

Here are the steps you should take when applying for a debt consolidation loan:

  1. Meet preapproval terms. Preapproval terms will differ between lenders, but typically they request that you have at least a 580 credit score and no bankruptcies. A lender will perform a soft inquiry on your credit to see if you meet their requirements before quoting you a rate. 
  2. Decide which credit card debts to pay off. Before choosing your loan terms, prioritize which of your credit cards you want to pay off first. This will dictate how much you borrow and the length of the loan. 
  3. Finalize your application. Finalizing your application requires a hard inquiry on your credit report.  
  4. Go through a closing process. If you’re approved, loans are disbursed either directly to your creditors or sent to you by check.
  5. Start paying off your debt.      

There are two types of debt consolidation loans: secured and unsecured. Secured debt consolidation loans use collateral, such as home equity. While secured loans typically have better interest rates, they can be risky. You could face foreclosure if you can’t pay your debt. 

Unsecured loans are more common and don’t require any collateral, but they typically have higher interest rates and are more expensive to pay down. 

How Do I Qualify for a Consolidation Loan?

To qualify for a debt consolidation loan, you must meet lender requirements. 

Lenders often use your credit score to determine your interest rate. Having a high credit score, a lower debt-to-income ratio and a stable income will increase your chances of securing a loan.

Traits to Increase Your Chances of Securing a Debt Consolidation Loan Image

Can I get a Debt Consolidation Loan with Poor Credit?

Lenders view people with low credit scores as high risk, so it might be difficult to get approved for a debt consolidation loan if you have poor credit. Those with poor credit who are approved will end up paying higher interest rates. 

If you have a low credit score, be cautious about taking out a debt consolidation loan. The interest rate on a debt consolidation loan could be higher than your existing debt, making it more expensive to pay down. 

How to Choose the Right Loan

When choosing a debt consolidation company, compare loan terms and interest rates to see how much interest and how many fees you’ll pay overall. This can help you pick the loan option that saves you the most money.

Here’s what you should consider when evaluating a debt consolidation loan: 

  • Interest rates: Most lenders offer a fixed-rate loan, while some offer both fixed- and variable-rate loans. 
  • Loan terms and restrictions: Review the loan period length and loan amounts to see whether the amount and repayment timeline meet your needs.  
  • Fees and penalties: Look at the origination, prepayment and late fees, which can significantly increase the cost of your loan. Some lenders place restrictions on how you use the loan, such as prohibiting consolidations on student loan debt.
Factors to Consider When Picking a Debt Consolidation Loan Image

Is it a Good Idea to Get a Debt Consolidation Loan?

There are benefits to using a debt consolidation loan, but there are also potential disadvantages. Ultimately, it depends on your personal situation. 

If you qualify for a new loan with favorable terms and a lower interest rate than your current debt, it could be a good idea. However, you need to consider your credit scores, income and ability to repay the loan.

Pros

  • Debt consolidation loans can have lower interest rates than credit cards and other types of debt, depending on your credit range. If you qualify for a low-interest loan, you can reduce your current interest rate and save money on repayment.
  • You can lock in a low rate with a fixed-rate debt consolidation loan instead of owing money at variable rates.
  • A debt consolidation loan gives you a debt repayment timeline specified in your loan agreement, so you’ll know exactly when you’ll pay off the loan. 
  • You’ll have payments that are easier to handle if the loan lowers your monthly payments. This means that you’re less likely to be subject to additional fees and higher interest rates that come with missing a payment.

Cons

  • People with low credit scores may only be given loans with a higher APR than their existing debt. 
  • You could wind up paying a lot more interest overall, depending on your loan’s interest rate. Although your monthly payment might be lower, your repayment term could be longer. 
  • A low-interest rate for a debt consolidation loan could just be a “teaser rate” that only lasts for a certain time. After that, your lender may increase the rate you have to pay.
  • The loan may also include fees such as application fees, origination fees or prepayment penalties that you would not have to pay if you continued to pay back your current lenders.
  • You put your house, car, retirement fund or other assets at risk when you use collateral to secure your loan. If you’re not able to pay your loan, you could face losing those assets.
  • You could end up in more debt if you get a consolidation loan and keep making more purchases with credit.

What are Alternatives to Debt Consolidation?

If debt consolidation isn’t your best option, there are other ways to manage your debt. 

  • Credit cards with an introductory 0 percent APR balance transfer allow you to consolidate your debt on one credit card. Be aware: if you are more than 60 days late on a payment, you face a penalty APR on all balances, including the transferred balance. There’s also usually a balance transfer fee, either as a fixed amount or a percentage of the amount you transfer.
  • Creating a budget can help you understand how much you can afford to pay each month toward existing debt. 
  • Responsible credit card usage can ensure you aren’t allowing your balances to get too high. If you’re spending more than you’re earning, consider adjusting the way you spend to pay off your existing debt.
  • Bankruptcy may be an option if you are overwhelmed with debt and see no way to pay it off. However, a bankruptcy can remain on your credit report for up to ten years.
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Do Consolidation Loans Hurt Your Credit Score?

A debt consolidation loan could actually help your credit score. If you have a high credit balance, consolidating could lower your utilization rate. Additionally, a lower payment each month could mean more on-time payments.

That being said, how your debt consolidation loan affects your credit score really depends on your ability to make your payments. Having monthly payments due on a loan, in addition to credit cards, could put you in an even more difficult situation.  

Managing Multiple Payments, Debt Consolidation Loans, and Your Credit Report

Many consumers turn to a debt consolidation loan because of the challenges they face keeping track of multiple accounts. 

Mistakes can happen, but if payments are applied to the wrong account or your accounts are reported more than once, it could make you appear risky to lenders. Mistakes on your credit report can be costly and unfairly affect your credit score if they go unfixed. 

Credit repair can be a hassle, especially if you are unfamiliar with the process. At Lexington Law, we do the heavy lifting to make the dispute process easier, by identifying and challenging questionable negative items on your behalf. Although we don’t manage debt consolidation loans directly, our team of credit report consultants can help you navigate the credit repair process. 

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Credit Cards

Do debt consolidation loans hurt your credit?

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

When done correctly, debt consolidation loans usually do not hurt your credit long-term. In fact, there’s a good chance that they will ultimately improve your credit. However, debt consolidation can initially knock your score down a bit, which is why it’s important to do your due diligence before pursuing this strategy.

Debt consolidation is a way to combine multiple debts into a single loan. This not only reduces the interest you owe, but it also helps you organize your debt, making payments more manageable.

Debt consolidation can have positive and negative effects on your credit score. Here are a few areas it may negatively impact:

  • Credit applications: Applying for a personal loan or a balance transfer card requires that a hard inquiry be performed on your credit. This will likely lower your score a bit initially as you get the consolidation process started.
  • Average age of credit: The ages of your credit accounts matter, with older accounts garnering better credit scores. When you open a new account, it lowers your average credit age, which may initially negatively impact your score.

On the other hand, the following categories tend to be positively impacted by debt consolidation:

  • Credit utilization: A new debt consolidation account will usually increase the amount of available credit you have. As long as you don’t begin spending significantly more after opening the new account, you’ll be using less of your available credit, which will benefit your score.
  • Payment history: If you consistently pay off your new loan on time, your credit will likely be positively impacted.

Effects on credit score depend on the debt consolidation method

Each debt consolidation method comes with its own benefits and drawbacks. It’s important to acquaint yourself with the potential impacts of each method to make sure that consolidating debt results in a net gain for your credit health.

Balance transfer

A balance transfer is the process of transferring debt to a single credit card with a lower interest rate, allowing you to pay off your debts for less. Many balance transfer cards offer zero-percent APR during an introductory period, providing a window to pay off debt interest-free.

Despite the benefits offered, a balance transfer card could damage your credit score. First, applying for a new credit card may warrant a hard inquiry, which can bump your score down a bit. Second, your credit score is partially determined by credit utilization, and transferring significant amounts of money to a card and then paying it off involves high credit utilization on that card. This will likely harm your score.

If you decide to pursue a balance transfer card to pay off debt, be sure to investigate the card’s APR following the introductory period. Your interest rate may take you by surprise and skyrocket if you don’t do your due diligence.

The average length of a 0% APR introductory period is around 12 months for balance transfers. Source: WalletHub

Personal loan

Another popular debt consolidation method is taking out a personal line of credit. These loans are available at any time and can be used to quickly pay off debt.

If used correctly, personal loans can improve your credit score by diversifying your credit mix, especially if you’ve only had credit cards up until this point. Paying off debt with a loan rather than with credit can also reduce your credit utilization, which may boost your score.

That said, it’s important to remember that this process involves taking out a loan that must be paid back on time. You may also want to reconsider this option if your present score doesn’t allow you to take out a personal loan without being charged a high interest rate.

Borrowing from a 401(k)

If you have a 401(k) retirement account, you can borrow up to half of this balance to pay off debt. While it must be paid back within five years to avoid penalties, borrowing from a 401(k) does not have any adverse effects on your credit score. Moreover, the money you borrow doesn’t accumulate interest since 401(k) funds aren’t borrowed from a lender.

However, it’s important to remember what a 401(k) is meant for—retirement. Taking out funds for short-term debt payments can significantly detract from your retirement savings. You may also have to deal with tax repercussions when taking this course of action.

Nearly one-third of Americans with retirement accounts have borrowed from those accounts in the form of a loan. Source: SHRM

Home equity loan or line of credit

Home equity loans or lines of credit are perhaps the riskiest forms of debt consolidation, but they also offer some significant benefits. Essentially, lenders will offer you a loan and use your home as collateral. This means that if you fail to pay off the loan within the amount of time agreed upon, you could lose your home.

You must have excellent credit to take out a home equity loan or line of credit. When you apply, you will be hit with a credit check, which could initially lower your score a bit. While the impact on your score will likely be relatively insignificant, these loans can also accumulate very high interest, so it’s important to use discretion before taking one out to pay off debt.

Other options to consider

If debt consolidation doesn’t feel right for you, that’s okay. There are other debt relief options that could help restore your peace of mind regarding your financial situation.

Debt management program

Debt management services can help by counseling you regarding your options when you’re struggling with debt. A debt management program will likely involve a counselor negotiating lower interest with creditors and potentially closing credit cards.

While visiting a counselor at a debt management agency doesn’t harm your credit score at all, entering into a debt management program that reduces how much you have to pay does usually negatively impact your score. Your credit report will likely reflect the debt management program in effect until you are no longer using it.

Debt settlement or bankruptcy

Debt settlement is the process of negotiating with creditors to pay significantly less money than you owe to have your debt forgiven. Bankruptcy is a legal process that helps people organize and sometimes eliminate their debt. Bankruptcy, however, is a more long-term option than the other ones we’ve mentioned.

These two options should be a last resort when struggling to pay off debt, as they can have a significantly adverse effect on your credit score. Both debt settlement and bankruptcy will remain on your credit report for upwards of seven years, and sometimes up to ten years, negatively impacting your ability to open new accounts or apply for a loan. However, if you need to take care of massive debt now and you take wise financial steps in the future, these processes could end up ultimately being the right solution for you.

Should I consolidate my debt?

Before pursuing debt consolidation, it’s important to take a comprehensive look at the reasons you’re interested in consolidating debt and your plans for the foreseeable future.

Do you have a high interest rate?

If the interest on the debt you owe is 20 percent or more, you’ll likely save money by consolidating debt. However, certain balance transfer options charge fees that may counteract the benefits of debt consolidation. Do your research ahead of time to figure out which option saves you more money.

Are you missing payments?

Keeping track of all of your accounts can be stressful. If remembering to pay your bills has been a struggle and you’ve found yourself repeatedly missing payments, debt consolidation may help. Consolidating your debt could simplify your financial life by allowing you to take care of all payments at once. This will also benefit your credit in the long run, since missed and late payments can be detrimental to your score.

Do you need excellent credit in the short term?

If you’re planning to take out a loan or a mortgage anytime soon, you may feel the need to safeguard your credit score at all costs. Since many debt consolidation methods will put a temporary dent in your score, it may be wise to hold off until after you’ve been approved by a lender.

Ultimately, whether you decide to pursue debt consolidation and which method you choose depends on the weight of your debts and what would benefit your credit most. If you’re still on the fence, it’s a good idea to consult a financial advisor before making any decisions that could have long-lasting consequences.

Whichever decision you make, remember to keep your credit health at the forefront of your mind, and to take the steps where needed to repair your credit to expand your financial opportunities.


Reviewed by Cynthia Thaxton, Chief Compliance Officer. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah, North Carolina and Virginia.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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How is credit card interest calculated?

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How is Credit Card Interest Calculated

If you’re like most people repairing their credit card debt, your credit card’s annual interest rate is a mystery to you. You might even avoid thinking about it or looking at it, because it’s such a large number. Interest rates can make it difficult to get out of debt quickly, because you’re working against a large percentage—as much as 16% or even 20% annual interest.

Credit card interest is calculated using a complicated formula that can be confusing to many people. So it often remains a puzzle to borrowers. But it’s important to understand the basics of credit card interest, because it will help you to repair your credit card debt quicker—and to be a smarter credit card user. Here’s how credit card interest works.

How Is Credit Card Interest Calculated?

credit card interest calculation

If you’ve watched your interest rate closely, you may have noticed that it has changed since you first opened your credit card. Many credit cards offer a low introductory interest rate that increases after the period is over. But even after that, your annual interest rate will often go up and down. That can be confusing, and even a bit unsettling.

Your interest rate changes

The first thing you should understand is that your credit card uses a variable interest rate. That means that the interest rate can change over time. A variable rate is tied to a base index—usually the U.S. prime rate. As the U.S. prime rate goes up or down, so will your credit card’s interest rate.

Right now, the U.S. prime rate is 4.25%. But your credit card’s interest rate is probably closer to 18.25%, or even more. That’s because credit card companies charge an additional amount above the U.S. prime rate—perhaps 14%, but it varies from card to card. So your total interest rate will be closer to 18.25%, annually. If the U.S. prime rate raises or lowers, your annual interest rate will also go up or down by the same amount.

The factors that influence the U.S. prime rate are reviewed every six weeks. The prime rate could stay the same for years, or it could change every six weeks. It all depends on current federal economic conditions and forecasts.

Your interest rate is annual

It’s also important to understand that your credit card’s interest rate is an annual rate. So if your annual rate is 18.25%, that amount is applied per year—not per month. But since you’re billed monthly, your interest is calculated each month, using an average daily balance method.

Calculating your interest rate

Here’s how the average daily balance works:

  1. Determine the daily periodic rate (DPR)—the interest rate you pay each day. DPR is your current interest rate (it varies, remember) divided by 365. So, 18.25 / 365 = 0.05%.
  2. Determine the average daily balance for the month. This is done by adding up the balance for each day of the billing period, then dividing that sum by the number of days (either 30 or 31 days—or 28 in February!). If you had a balance of $0.00 for 10 days, then $500.00 for 10 days, then $1000.00 for the last 10 days of the month, your average daily balance would be $500.00.
  3. Multiply the DPR by the number of days in the billing cycle, then multiply that total by the average daily balance. This is your interest for the month. So, a DPR of 0.05% * 30 days = 1.5%. 1.5% * $500.00 = $7.50.

That might not sound like much, but if you’re an average cardholder in the United States, you’re carrying a credit card debt of $16,000.00. That means you’re paying $2,880.00 per year in interest alone, in this scenario.

How Can I Avoid Paying So Much Interest?

When you’re working hard to repair your credit card debt, it can be frustrating to be fighting against a high interest rate. But there are ways you can reduce—or even eliminate—the amount of credit card interest you’re paying each month.

Pay more than the minimum balance due

Your credit card statement lists a minimum amount that you must pay each month. Your interest for the month is rolled into that minimum payment. But if you pay more than the minimum, every dollar above that minimum goes towards your principal balance. There’s no interest charged on it.

In other words, if your minimum payment is $500.00 and you pay $600.00, that extra $100.00 is applied to the amount you borrowed—it’s interest-free. And that benefits you in two ways:

  • You’re paying off debt without paying interest
  • You’re lowering the dollar amount of interest you’ll have to pay next month, because your average daily balance will be smaller.

Open a balance-transfer credit card

credit card interest

A balance-transfer card can be a very helpful way to repair your credit card debt. A transfer credit card has a very low introductory interest rate—often as low as 0%. The card lets you transfer your balance from other debt onto the new card. You can then make monthly payments on the transfer card to pay down your existing debt.

But the low interest rate is only valid for a limited time—usually six to 18 months—so you’ll need to pay off the debt before the introductory rate expires. You should also do your homework: some transfer cards charge a transfer fee. And some charge a penalty APR, which allows the credit company to charge you a high interest rate if you miss a payment.

Pay off Your Credit Card Debt Faster

Your credit card’s annual interest rate doesn’t have to be a confusing mystery, and you don’t need to know everything there is to know about interest rates. But when you understand the basics of variable interest rates and how they’re calculated, you can use that information to repair your credit card debt faster and easier. Paying more than the minimum balance due and using a balance-transfer card can be very helpful ways to use interest rates to your advantage.


A reputable credit repair specialist can help you find other ways to successfully get out of credit debt. If you’re tired of struggling on your own, find out how our advisors can help you repair your credit debt. Contact us today.

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Your guide to debt collection

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The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

As of March 2020, consumer debt totaled a whopping $14.3 trillion in the United States, and around a third of all Americans had at least one debt in collections. They weren’t just struggling with paying off debts—the Consumer Financial Protection Bureau noted in 2019 that about one-fifth of the complaints it received were about debt collectors. This isn’t a surprise when you consider that there are approximately 7,800 collection agencies in the United States, and the third-party debt collection market is a $12.7 billion industry.

If you’re dealing with a debt in collections, learning about your rights and the options you may have can help you take positive action. And that can help increase the likelihood of a more favorable outcome for you. Find out more below.

Your legal rights against debt collectors

The good news is that you’re not alone when you’re dealing with debt collectors. You actually have a lot of laws on your side. A number of federal acts specifically address debt collections, and government organizations are in place to help you protect your rights as a consumer.

FDCPA

The Fair Debt Collection Practices Act provides numerous provisions to protect consumers from unfair debt collection activity. Some of those provisions include:

  • Debt collectors can’t engage in harassment or abusive behavior, including calling excessively or outside of normal times.
  • Collectors have to disclose that their communication is an attempt to collect on a debt.
  • You have the right to ask debt collectors to stop contacting you. They have to abide by your written request, but that doesn’t mean you stop owing the debt.
  • When asked, debt collectors have to provide validation of your debt.
  • Debt collectors can’t violate your privacy by discussing your debt with others.

FCRA

The Fair Credit Reporting Act helps protect you from other types of abusive actions by debt collectors. Specifically, this law mandates fair and accurate credit reporting. If you find a potential error on your credit report, you can write to the bureau in question and ask them to investigate it. By law, they have to investigate, and if the reporting creditor or collection agency can’t prove those facts, the bureau has to delete or correct the information.

The FCRA also gives you the right to at least one free credit report per year from each credit reporting agency. Plus, you have the right to a copy of your credit report if it’s used to evaluate you for credit and you’re denied because of information in your credit file.

TCPA

The Telephone Consumer Protection Act restricts how autodialers and other phone call tech can be used. Specifically, debt collectors and others can’t use autodialers—aka robocallers—to call your cell phone.

UDAP regulations

Unfair or Deceptive Acts or Practices refer generally to behaviors in financial and accounting sectors that aren’t legal or ethical. They’re prohibited by Section 5 of the Federal Trade Commission Act and regulated by a number of entities at the federal and state levels. What you need to know with regard to debt collectors is that anyone dealing with financial products must be transparent and honest about certain facts, such as how much you owe and how it was calculated.

State debt collection laws

As a federal law, the FDCPA is enforced in all states. Some states enforce it differently than others, and some have their own laws that add even more protections. States that have their own fair debt collection laws include California, Colorado, Florida, Georgia, Illinois and Washington.

Summary of your rights

Overall, the list of rights and protections set out by these laws is designed to make debt collection fairer for consumers. The laws seek to ensure you have:

  • Access to fair and accurate information about your debts
  • Protection for your privacy
  • Protection against abusive actions by debt collectors

How debt collection agencies work

Debt collection agencies are required to follow all the laws above. But just because the law is on your side when it comes to fairness and accuracy, it doesn’t mean you won’t ever deal with a debt that puts some stress on you. Understanding how debt collectors work can help you know what to expect and when someone might be crossing the line into illegality.

When can a debt be sent to collections?

A debt can go to collections as soon as you default on it. The exact timeline depends on your contract with the lender and the lender’s policies.

Statute of limitations on debt

The statute of limitations on debt is how long a creditor or collection agency can attempt to collect through legal means, including filing a lawsuit. The timeline varies by state and usually starts when you first default. In some cases, you can reset the statute of limitations by making payments on old debt, so this is something to be aware of when dealing with collectors.

How debt collection agencies are allowed to contact you

Debt collection laws dictate when and how collectors can contact you. Debt collectors can’t call certain workplaces, and they can’t continue to call you at your workplace if you tell them to stop.

Debt collectors can also only call you between the hours of 8 a.m. and 9 p.m. in your time zone. They’re allowed to contact you via methods that include phone, email, fax or mail, and starting in fall 2021, debt collectors will also be allowed to contact you via text and social media.

What to do when a debt collector contacts you

It can be tempting to throw a collections bill in the trash or shove it into a drawer to deal with down the road. That’s even more tempting if you know you can’t pay the bill today. But ignoring the debt doesn’t make it go away and can lead to even more stress down the road.

Here are some steps to take if a debt collector contacts you:

  • If the collector calls you, ask for verification of the debt or something in writing. Never just pay debts over the phone that you don’t know the details of—even if the collector is trying to pressure you.
  • Once you receive the first notification of the debt in writing, review the information and see if you think it’s accurate. You can contest the information or ask for validation of the debt, requesting documents such as a signed contract or a statement. However, you only have 30 days to do this, so don’t put it off.
  • If you plan to make a payment right away, double-check all the information first. Making a payment is seen as acceptance of the debt, so doing so can make it harder for you to dispute something about the debt later.
  • In cases where you want to dispute the debt or don’t think the amount you owe is correct, gather your own documentation. Pull out old statements, contracts or bank statements that show you already paid the debt, for example.
  • Once you determine the debt is yours and is accurate, pay it off quickly if you can. That helps you avoid issues such as lawsuits or judgments that could lead to garnishments or liens.
  • If you receive a court summons because you’re being sued by a collector, show up in court on the hearing date. Not showing up usually means the judge decides for the creditor by default, which means a judgment will be entered against you. That judgment makes it possible for the creditor or collection agency to garnish your wages or checking account or enter liens against your property.
  • Bring legal representation if you can. According to Pew Research, less than 10 percent of people in these types of cases have legal representation, but those who do are more likely to win their cases or reach an agreed-upon settlement.

Remember that collection situations can be complex and your situation is unique to you. If you’re not sure what the best action for you is, you may want to consult legal professionals.

Illegal debt collection practices

Illegal or unethical debt collection practices are unfortunately more common than many realize. From January 1, 2020, through September 2020, for example, the FTC’s Consumer Sentinel Network received tens of thousands of reports from consumers about concerning collection practices—more than 85,000 reports, to be exact. And roughly 45 percent of those were from people who didn’t owe the money or who said they were targeted by threatening or abusive collector behavior.

The first step to recognizing whether you’re being targeted by illegal practices is knowing your rights. If your rights under any of the above laws are being infringed upon, someone might be doing something illegal. You can report those actions to various agencies—more on that below.

Before we get there, though, here are some red-flag behaviors to know about. These are all potential signs that something illegal is going on:

  • Someone claims they can or will arrest you for a debt.
  • Someone shares information about your debt with your family members or anyone who is not you.
  • Someone attempts to claim you owe a debt or must pay a debt that belongs to a relative.

How to report illegal debt collection behavior

If a debt collector violates any of the debt collection laws discussed above, you can and should file a complaint. There are several agencies where you can file these types of complaints, and depending on the situation, you might even file a complaint with more than one.

You can report a debt collector to:

  • The Federal Trade Commission. The FTC enforces the FDCPA and uses the FTC Act to help stop unfair debt collection practices. You can report issues such as bad business practices, scams and fraud to the FTC. Gather the following information and then complete the reporting process on the FTC’s site:
    • Details of the activity and product or service involved
    • Any amounts you paid and the dates you made payments
  • The Consumer Financial Protection Bureau (CFPB). You can submit a complaint online to the CFPB. Complaints are used to launch potential investigations and ensure compliance, and the CFPB says 97 percent of people who complete its form get a response within around 15 days. The CFPB does reach out to the collection agency in question to get a response about the matter too.
  • The Association of Credit and Collection Professionals (ACA International). The ACA is an industry association for collection and credit companies and professionals. Membership can bring important perks, but having members who aren’t compliant with collections laws isn’t ideal. If a collection agency that’s a member of this organization is acting illegally, you might want to let the ACA know.
  • The Better Business Bureau. The BBB is a go-to resource for many consumers. You can check with the BBB to find out if a collection agency already has complaints for the type of activity you’re dealing with. You can also file your own complaint.
  • Your state’s Attorney General. States have their own oversight and rules into collections. They also all enforce the federal laws listed above. You can report illegal collection activity to your state Attorney General’s office. Locate the website or contact information for your state’s office at USA.gov.

What to do if you can’t pay the amount in collections

So, what happens if you owe the money and the collector follows all the laws? You may need to pay up. If you can’t pay the amount due immediately, you have a couple of options to consider.

Debt settlement

A debt settlement occurs when you agree to pay a lesser amount and the collector agrees to consider the matter closed. Often, third-party debt collectors buy a debt for pennies on the dollar, so they can still make money even if you don’t pay the total amount due. That makes them more likely to settle for something over nothing.

Settling a debt means you don’t legally owe it anymore. But make sure you get the agreement in writing or the debt collector could try to come after you for the rest.

Paying off a debt—in full or via settlement—doesn’t necessarily improve your credit score, especially immediately. But it also doesn’t hurt your score, since the collection account is probably already on your report. And it may be better than a charge-off.

Bankruptcy

If you can’t pay the debt and are dealing with other financial issues, you might consider bankruptcy. Filing a bankruptcy petition puts an automatic stay in effect, so debt collectors can’t continue collection activity. However, bankruptcy can have serious consequences for your credit, so make sure to talk to an attorney first so you can make an educated decision.

Negotiation

You may be able to negotiate with the collection agency to make several smaller payments over time to pay off the debt. Again, make sure you get any agreement in writing to protect yourself.

Watch your credit during the debt collection process

Whether you’re dealing with collection activity on an account you don’t think you owe or you want to repair your credit after dealing with legitimate collection activity, Lexington Law may be able to help. Find out more about our credit repair services to see how we can help you dispute inaccurate information on your credit score and begin taking positive actions to potentially impact your credit score.


Reviewed by Brad Blanchard, Supervising Attorney at Lexington Law Firm. Written by Lexington Law.

Brad is an attorney at Lexington Law firm whose practice is primarily focused on corporate compliance. His focus is primarily in the areas of marketing and advertising of financial services. He regularly deals with issues related to FTC Regulation 5, UDAAP, FCRA, FDCPA, CROA, TCPA, and TSR. He also has experience in LLC formation, contract review and negotiation, and trial and litigation experience in the areas of consumer protection and family law. Prior to joining Lexington Brad worked on Department of Labor administrative law cases and federal class action lawsuits. He also externed for a Utah State Court trial judge where he worked on both civil and criminal cases. Brad is licensed to practice law in Utah and Ohio. He is located in the North Salt Lake office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

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