Whatever you did or didn’t do to get you to this point, there’s no turning back. You’ve just gotten a call from a debt collector about a bill you never paid. It may be tempting to try to ignore the calls until they stop coming. After all, even paying off the debt may not undo the damage that’s been done to your credit score.
But as appealing as it is to lay low until the debt collector goes away, there are good reasons why you should consider paying off your collections account as quickly as possible.
1. Lenders look at more than just your credit score
Even if your credit score alone is good enough to qualify you for a loan, you may not get approved. If you have unpaid collection accounts on your credit report, prospective lenders may consider you too risky of a borrower. In the case of an FHA loan, lenders are required to include your collection accounts — medical collections excluded — in your debt-to-income ratio, which can decrease the amount you qualify for or increase your interest rate.
2. You can avoid legal problems
If you don’t pay your account, the debt collection agency can sue you to collect the balance. If the court rules against you, the debt collector can request a court order to garnish your wages from your paycheck. If this happens, not only do you have to pay the account in full, but also you’re on the hook for attorney fees and court costs.
Nerd note: Debt collectors can sometimes be aggressive when trying to persuade you to pay off your balance. It’s important that you know your rights as a consumer and to report any actions that violate them. Plus, each state has a statute of limitations after which a collector can’t sue you to collect on a debt.
» MORE: How to pay off debt
3. It could help your credit score in the future
FICO 9, the new FICO credit scoring model that was introduced in fall 2014, disregards paid collection accounts when calculating your credit score. In previous scoring models, paid and unpaid collection accounts were treated equally — with the exception of FICO 8, which ignored collection accounts under $100.
Although lenders aren’t required to update to the newest FICO scoring model, they may adopt it over time. So although leaving an unpaid collection account on your credit report doesn’t hurt your credit score under the FICO models that most lenders use, paying it will boost your score once lenders switch to the latest version. Because we can’t predict when lenders will do this, it would be wise to pay it off sooner than later.
4. It can be more expensive if you wait
If your original loan contract authorizes “collection costs,” the collection agency can charge you any reasonable amount to obtain credit reports and pay court costs and attorney fees in addition to interest. If you plan to pay off the account at some point, doing it sooner could help you avoid the extra fees. In some instances, you may even be able to settle with the collector for less than what you owe.
5. You’ll sleep better at night
A recent study shows that debt has been linked to depression and anxiety. These symptoms can be aggravated if you have to deal with collections calls and legal issues. If you’re unsure how to proceed on your own, consider using a credit counselor. Though this whole process may not be easy, the peace of mind you get once it’s gone can be invaluable.
The bottom line: When it comes to debt, you’re usually better off paying it before the lender sends it to collections. However, if you find yourself unable to do so, there’s more at risk than your credit score. Paying off your collection accounts can help position you to improve your overall financial well-being for the long term.
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