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Falling behind on bills damages your credit, and the later your payment is, the worse things get.
If it has been 90 days or more since your last payment, your lender may have sent your account to collections.
If your score was damaged by the collection, is there a reason to pay? It turns out there are some good reasons to pay off an account that’s in collections. Here's what you need to know.
Paying won't take a collections account off your credit reports
Many people believe paying off an account in collections will remove the negative mark from their credit reports. This isn’t true; if you pay an account in collections in full, it will show up on your credit report as “paid,” but it won’t disappear. In fact, you should expect it to remain on your report for seven years.
This means that it could affect your credit score, the three-digit number used to judge your creditworthiness, for that length of time. The sharpest drop to your scores will happen when the account is first reported to the credit bureaus as in collections and then the damage lessens over time.
But paying can help you
If paying is not going to heal your credit, what’s the point? Paying can benefit you in other ways:
You'll avoid legal action: If your debt hasn’t yet passed the statute of limitations, the collector could sue you for the money you owe, perhaps leading to wage garnishment. Paying off your account in full will help you avoid going to court.
You'll stop the debt collection musical chairs: Unbeknownst to many consumers, debt collectors constantly buy and sell accounts.
You'll avoid additional interest and fees: It’s complicated, but in most states collectors are allowed to keep charging you interest and fees after they’ve purchased your debt. Paying quickly can keep this to a minimum.
You'll look better to lenders: Once an account in collections is marked as “paid” on your credit report, you might have a better shot at getting another loan. According to Tracy Becker, president of North Shore Advisory, a credit education and restoration company in Tarrytown, New York: “The majority of mortgage lenders do not want to approve a mortgage application when there is open bad debt on credit profiles.”
You'll be ready for the future: The latest FICO scoring model, known as FICO 9, weighs medical debts in collections less heavily than other types of debts and ignores paid accounts in collections entirely. By paying off your account, you’re setting yourself up for a better credit score as more and more lenders upgrade to FICO 9.
Will it help your credit score?
All credit scoring models penalize you for having unpaid collections, although some have a $100 threshold. Some don't continue to penalize you once collections are paid. Here's what to know:
VantageScore 3.0 does not penalize paid collections, so that score will improve if you pay a collections account.
The FICO 8, which is used in most credit decisions, does penalize paid collections. The newer FICO 9 model does not.
Collections for debts that were originally under $100 are disregarded for scoring purposes in FICO 8, FICO 9 and VantageScore 3.0. However, older models, such as the ones typically used for mortgages, do consider them.