Depending on the credit score model being used, you might benefit in other ways in addition to seeing a score increase.
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Falling behind on bills damages your credit, and the later your payment is, the worse things get. If you haven’t made a payment in 90 days or more, your lender might have sent your account to collections.
Your credit reports then display the collections account as a tradeline, alerting prospective lenders to your past-due payments. For many lenders, this raises red flags because they use your credit report to determine whether you can repay the money you borrow.
A 2023 report published by the Consumer Financial Protection Bureau states that the median collections balance is $382. Market Snapshop: An Update on Third-Party Debt Collections Tradelines Reporting. Accessed May 26, 2023. View all sources. Medical collections make up 57% of all collections on consumer credit reports, according to the CFPB. Rental/leasing, utility, and telecommunications are other common types.
Even though it could be tempting to ignore a past-due account, there are valid reasons to settle one. Heres what to consider.
Thus, your collection account is looming large over you, akin to a threatening cloud on a bright day. It’s a continual reminder of a previous financial error, and you’re undoubtedly wondering if you should settle it or not.
The answer, as with most things in life, isn’t a simple yes or no. It depends on a few factors, like the age of the collection, your current credit score, and your overall financial goals. But fear not, intrepid credit warrior, for I’m here to guide you through the murky waters of collections and help you make the best decision for your credit score.
The Lowdown on Collections
First, let’s get the basics straight. A debt that has been turned over to a collection agency after you haven’t paid it for a predetermined amount of time is known as a collection account. This could be anything from a medical bill to a credit card payment. Collection agencies attempt to collect the full amount from you after purchasing these debts from the original creditor for a small portion of their worth.
Now here’s the kicker: collections can stay on your credit report for up to seven years, even if you pay them off. That’s a long time to have a black mark on your credit history, and it can seriously damage your credit score.
Paying Off Collections: The Pros and Cons
So, should you just bite the bullet and pay off that collection account? Well, it’s not as simple as that There are both pros and cons to consider:
Pros:
- Boosts your credit score: This is the big one. Paying off a collection account can significantly improve your credit score, especially if it’s a recent collection. The exact amount of improvement will vary depending on your credit history, but it can be a substantial jump.
- Removes the negative mark: Once you pay off the collection, it will be marked as “paid” on your credit report. This is better than having an unpaid collection, which will continue to drag your score down.
- Stops the collection agency from harassing you: Collection agencies can be relentless, calling you multiple times a day and sending threatening letters. Paying off the debt will put a stop to this harassment.
Cons:
- You’re giving money to a collection agency: Let’s face it, collection agencies aren’t exactly known for their customer service. By paying them, you’re essentially rewarding them for buying your debt for pennies on the dollar.
- It could restart the statute of limitations: In some states, paying off a collection account can restart the statute of limitations, which is the amount of time a creditor has to sue you for the debt. This means that the original creditor could come after you for the full amount of the debt, even if it’s been years since they last contacted you.
Unpaid Collections: The Risks and Rewards
That being said, there are a few potential benefits as well as some risks associated with choosing not to pay off the collection account:
Risks:
- Your credit score will continue to suffer: As I mentioned before, collections can stay on your credit report for up to seven years, even if you don’t pay them. This can have a significant negative impact on your credit score, making it difficult to qualify for loans, credit cards, and even jobs.
- The collection agency could sue you: If the collection agency is aggressive, they may decide to sue you for the debt. This could result in a judgment against you, which could lead to wage garnishment or even asset seizure.
- The debt could continue to grow: Collection agencies often add fees and interest to the original debt, which can make it even harder to pay off in the future.
Rewards:
- You don’t have to pay the collection agency: This is obviously a major perk. If you’re struggling financially, it may make more sense to focus on paying off other debts or saving up for emergencies.
- The collection account will eventually fall off your credit report: After seven years, the collection account will be removed from your credit report, and your credit score will start to recover.
The Verdict: Paid or Unpaid?
So, what’s the final verdict? Should you pay off that collection account or let it ride?
The answer, as I said before, depends on your individual circumstances. Here are a few factors to consider:
- Your current credit score: If your credit score is already low, paying off the collection account is likely to give you the biggest boost.
- The age of the collection: If the collection is relatively new, paying it off will have a bigger impact on your credit score than if it’s older.
- Your financial situation: If you can afford to pay off the collection without putting yourself in financial hardship, it’s probably a good idea to do so.
- Your risk tolerance: If you’re risk-averse, you may want to pay off the collection to avoid the possibility of being sued.
- Your overall credit goals: If you’re planning on applying for a loan or credit card in the near future, paying off the collection will improve your chances of getting approved.
Ultimately, the decision of whether or not to pay off a collection account is a personal one. There’s no right or wrong answer, and it’s important to weigh all of the factors involved before making a decision.
Additional Tips
Here are a few additional tips for dealing with collection accounts:
- Dispute any errors on your credit report: Before you pay off a collection account, make sure that it’s accurate. You can dispute any errors on your credit report with the credit bureaus.
- Negotiate with the collection agency: You may be able to negotiate a lower payoff amount with the collection agency. This is especially true if the debt is old or if you have a good payment history.
- Get everything in writing: If you do negotiate with the collection agency, make sure to get everything in writing. This will protect you in case there are any problems later on.
- Seek professional help: If you’re feeling overwhelmed by debt, consider talking to a credit counselor or financial advisor. They can help you create a budget and develop a plan to get out of debt.
You’ll avoid legal action
The collector may file a lawsuit against you for the amount you owe if the statute of limitations hasn’t yet passed, which could result in wage garnishment. Paying off your account in full will help you avoid going to court.
Effect on credit scores depends on provider and debt type
FICO and VantageScore, the two major credit scoring providers, take collections accounts into consideration when calculating scores. However, some scoring models dont continue to penalize you once collections are paid.
- Paid collections: VantageScore 3. 0 and 4. If you pay a collections account in full, those scores will be positively impacted because 0 does not penalize paid collections. Paid collections are penalized by FICO 8, the model used in the majority of credit decisions. The newer FICO 9 model does not.
- Lower debt amounts: In FICO 8 and all subsequent FICO models, “nuisance accounts,” or collections for debts that started at $100 or less, are ignored for scoring purposes. VantageScore versions 3. 0 and newer ignore collections under $250.
- Medical collections: The way that paid and unpaid medical debt are accounted for when determining a score has undergone significant modifications. No matter the amount or duration of the debt, VantageScore intends to remove medical collections from its 3 0 and 4. 0 score calculations. Additionally, paid collections and unpaid collections with an initial balance of less than $500 were removed from credit reports, according to the three major credit bureaus (Equifax, Experian, and TransUnion).
Should You EVER Pay Collections – Common Sense Advice | Will Paying Collections Improve Your Credit
FAQ
Is it better to pay collections or not?
Is it better to have a collection removed or paid in full?
Can paying off collections raise your credit score?
Is it better to settle collections or pay in full?
Should you pay off collection accounts?
There are several benefits to paying off collection accounts: Improved Credit Score: Paying off collection accounts can help improve your credit score. Even though the collection account will still appear on your credit report for up to 7 years, having a paid collection account is better than having an unpaid collection account.
Should you pay your collection account on time?
If you are paying other credit cards and bills on time, this will bolster your credit score in spite of collection debt, Noisette adds. “That can counteract the negative impact,” she says. Can Your Credit Improve if You Pay Your Collection Account?
Do paid collections hurt your credit score?
Creditors view collection accounts as red flags, but likely view paid collections with less disfavor than unpaid ones. The most recent version of the FICO ® Score ☉ (FICO 9) and versions 3.0 and 4.0 of the VantageScore ® credit scoring systems agree: Unpaid collections can hurt your credit score, but paid ones do not.
Does a ‘paid collection’ lower a score if a collection is unpaid?
The claim is that when updated from “unpaid” to “paid,” the collection can appear to the scoring formula as having originated more recently than it did, which, if true, could lower the score.