1 in 3 Americans is dogged by debt collections

Published: July 30, 2014 12:26 p.m. ET


Why consumers allow overdue debt to pile up


Personal finance reporter

Americans are taking a hit on their credit scores by ignoring overdue debt.

One in three adults have a debt in collections reported in their credit files, according to a new report by the Urban Institute, a nonprofit organization that focuses on social and economic policy. And more than 77 million Americans owe an average of $5,200. Debt in collections refers to a debt that is 180 days past due and includes a credit card balance, child-support obligation, medical or utility bill, parking ticket and overdue membership fees, but excludes mortgage-related debt.

“This delinquent debt can harm credit scores and that can restrict access to credit and increase the cost of credit and insurance and tip employer decisions,” says Caroline Ratcliffe, a senior fellow at the Urban Institute.

Credit files give a more detailed picture of a person’s debt obligations than a credit report. What’s more, the debt can remain in a person’s credit file for seven years, she says, and many consumers may not know they are delinquent and only become aware of collections debt when they review their credit report.

So why don’t people take action? They may be embarrassed, believe that financial counseling costs too much or will damage their credit report, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. Counseling through an NFCC member agency is either free or low cost, she says. (Find a member agency here.)

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And credit counseling is not reported to credit bureaus and does not have a negative impact on a person’s credit report or score. Although if a person repays their debt through a debt-management program, the creditor may make a notation on the credit report of participation in the program. Nonetheless, graduates of these programs often emerge with improved credit scores, she says.

Also see: How one couple wiped out a $125,000 debt

Nevada, which was one of the hardest hit states during the housing crisis, tops the Urban Institute’s list of U.S. states where people hold non-mortgage debt on their credit files: 47% of people with a credit file have reported debt in collections in that state. Nevada also has the highest average collections debt ($7,198). Twelve other states and the District of Columbia also top 40%: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Texas and West Virginia.

Only three states have less than 4% of the credit file population with debt past due: Utah, Washington and New Jersey, and another three states have more than 7% of their credit file population with debt past due: Louisiana, Texas and Mississippi. In general, low-debt areas tend to be low-income and less-populous areas, Ratcliffe says. For instance, the largest 100 metropolitan statistical areas have high average debt levels, occurring mostly where homeownership is prevalent and prices are high.

Other articles by Quentin Fottrell:

6 white-collar criminals for hire

Half of Americans can’t afford their house

Financial secrets of the Amish

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