Falling behind on bills isn’t fun. 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 given up on trying to get the cash from you and sent your account to collections.
Will it help your credit to pay? It depends upon the credit-scoring model. All credit scores penalize you for unpaid collections, and some penalize for paid collections as well. 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. But the newer FICO 9, does not. So your credit score might improve, but it might not. (Collections for debts that were originally under $100 are disregarded for 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.)
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 collections account won’t take it off your credit report
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 banks use to judge your creditworthiness, for that length of time. The sharpest drop to your score will happen when the account is first reported to the credit bureaus as in collections. The impact of the negative mark will lessen over time, but there are things you can do to hurry it along.
Reasons to pay
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. Paying off your account in full will help you avoid going to court.
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 stop the debt collection musical chairs: Unbeknownst to many consumers, debt collectors constantly buy and sell accounts. If you don’t pay it off, your account could pass through the hands of several collectors, and this could end up doing more damage to your credit.
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.
Collections image via Shutterstock