Seeing the words 'collections account' on your credit report is stressful, especially when it's tied to something as essential as your vehicle. It means your original car loan has gone into serious default, and the debt has been passed on to a collection agency. This is a significant event for your financial health, but it's one you can understand and manage.

How Does a Car Loan End Up in Collections?

A loan doesn't go to collections overnight. It's the final step in a long process of missed payments. Here's the typical journey:

• Missed Payments: It usually starts after you've missed several consecutive payments-typically 90 to 120 days (3-4 months).
• Lender's Efforts: During this time, your original lender (the bank or finance company) will try to contact you repeatedly to arrange payment. They want to resolve the issue directly if possible.
• Charge-Off: If they can't collect the money, the lender will eventually 'charge off' the loan. This is an accounting term meaning they've declared the debt a loss on their books. It does not mean the debt is forgiven.
• Sold to Collections: After charging it off, the lender often sells the debt for pennies on the dollar to a third-party collection agency. This agency now owns the debt and will try to collect it from you.

At this point, the original loan account on your credit report will be closed and marked as 'charged off' or 'sent to collections,' and a new, separate 'collections' tradeline will appear.

The Impact on Your Credit Report and Score

A collections account is one of the most damaging items that can appear on your Canadian credit report. Its impact is severe and long-lasting:

• Major Score Drop: Your credit score will drop significantly. The exact number of points depends on your score before the collection, but it's often a drop of 50 to 100 points or more.
• Negative Rating: In Canada, this type of account is typically assigned an 'R9' rating, which is the worst possible credit rating for a revolving or installment account.
• Long-Term Damage: A collections account will remain on your Equifax and TransUnion credit reports for about six to seven years from the date of your last payment (the 'date of last activity'), depending on your province.
• Difficulty Getting New Credit: Lenders for mortgages, future car loans, or even credit cards will see the collections account as a major red flag, making it extremely difficult to get approved for new credit at decent interest rates.

Your Options for Dealing with a Collections Account

Facing a collections agency can be intimidating, but you have options. It's important to communicate with them and figure out a plan. Ignoring them is the worst thing you can do, as it could lead to legal action.

1. Pay the Debt in Full

If you have the funds, paying the full amount owed is the cleanest way to resolve the issue. Once paid, the account status on your credit report will be updated to 'Paid in Full.' The collection will still be on your report for several years, but a paid collection looks much better to future lenders than an unpaid one.

2. Negotiate a Settlement

Collection agencies often buy debt for a fraction of its value, so they are usually willing to negotiate. You can offer to pay a lump-sum amount that is less than the total you owe. If they agree, get the settlement offer in writing before you send any money. The account will then be marked as 'Settled' or 'Settled for less than full amount.' This is better than leaving it unpaid, but not as favourable as 'Paid in Full.'

3. Dispute the Debt

If you believe the debt is not yours, is the wrong amount, or is too old to be collected (past the statute of limitations in your province), you have the right to dispute it. You should first send a written request to the collection agency asking for proof of the debt and then file a dispute with the credit bureaus (Equifax and TransUnion) if you find inaccuracies.

Moving Forward and Rebuilding Your Credit

Dealing with a collections account is the first step. The next is rebuilding your credit history. Once the collection is marked as paid or settled, you can begin to show lenders that you are a responsible borrower again.

Start with small, manageable steps like getting a secured credit card and making every single payment on time and in full. Over time, as you build a new history of positive payments and the collections account gets older, its impact on your credit score will lessen. It takes patience and discipline, but your credit can recover.