The Difference Between a Creditor and a Collection Agency

Wednesday, December 11th, 2013 By

Creditors and Collection Agencies are not always the same

Many people do not realize the difference between a creditor and a collection agency. Because of this, misconceptions about the rules of how each can collect on a debt exist. To gain an understanding of these differences, it is important to first identify what both are and how they collect on outstanding debts.

What is a Creditor?

A creditor is the original entity that extended credit, service or a loan. This can refer to credit card companies, department stores, banks or any number of similar companies. Creditors are not generally the same as a collection agency, although many have their own internal collection departments.

How Do Creditors Collect on Debts?

First, creditors rely on consumers to responsibly pay their debts on time according to whatever schedule was originally agreed upon. This is generally done by a statement being sent to a consumer on a regular basis, which a consumer is then expected to pay on or before a designated due date. However, when this does not happen, creditors will usually charge late fees to the account, send a series of reminders and make phone calls in an attempt to collect on debts when accounts become delinquent. As time progresses, if an account remains unpaid, creditors will generally stop the consumer from using the account any further, send the account to their collections department or even hire an outside collection agency to work on collecting the bad debt.

How long does it generally take before an account is given to a Collection Agency?

This can depend, as each company has its own methods of dealing with bad debt. Usually, the process can be anywhere from three to six months. Communicating with the creditor and making an effort to make minimum payments can delay or completely stop the account from being assigned to a third-party collection agency. Once a debt goes to a collection agency, most consumers have lost any chance of negotiating with the original creditor.

How do Collection Agencies work?

Most collection agencies buy bad debt from creditors and attempt to collect on those debts for less than their original amount. Sometimes agencies will even work on a commission basis and creditors will pay them a percentage on what they are able to collect. It is not unusual for collection agencies to assign an attorney to attempt to collect on bad debt or resell a debt to another agency if they are unable to collect on it.

How far can Collection Agencies go in collecting on a bad debt?

The Fair Debt Collection Practices Act (FDCPA) regulates what collection agencies can and cannot do. Consumers should be aware, however, that the FDCPA only applies to third-party collection agencies and not to the original creditor or to its internal collections department. The FDCPA protects consumers by not allowing collection agencies to call a person’s home after nine at night or before eight in the morning. Collection agencies are not allowed to threaten a person, they are not allowed to call a person’s job if they are told that an employer does not allow collection calls, and they are not allowed to call personal friends and family members to speak to them about a person’s private finances.

Resolving Debt

Paying debts on time is always the best way to protect one’s credit rating while avoiding negative contact with creditors and collection agencies. However, when one falls behind in repaying a loan, credit card debt or other debts, a cash advance or a loan till payday may help. If bad debt continues to be a problem and accounts are referred to a collection agency, understanding how such agencies operate can be very important in learning how to communicate with them to resolve a debt.

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