Will paying a collection account off in full improve one's credit scores?
I feel like I've answered this question hundreds of times over the past 8 years as I've moderated our Credit Talk Forum. But when I was asked the same question last week by a close friend, it once again reminded me just how confused the average consumer remains regarding collections and how they affect credit scores.
When most responsible people learn of a collection that has popped up on their credit reports, they immediately panic because they know their credit has already taken a hard hit. So what do they do? They pick up the phone, call the collection agency, immediately pay off the debt, and then expect that everything will be fine going forwards.
Much to their dismay, when checking their credit reports a month down the road, they realize that the ugly collection remains and now simply reads that it is "paid". So what does this mean for their credit scores? And is a "paid" collection really any better than an "unpaid" collection?
No matter what anyone tells you, unless a potential lender is using the brand new FICO 9 credit score that completely disregards collections paid in full (most lenders do not yet), it's a BIG fat credit myth that paying off a collection account in full will improve your credit scores. In fact, most credit-scoring models still essentially treat a paid collection in the same way they treat an unpaid collection. They're both negative marks, and they will both really hurt your credit scores as they can remain on your credit reports for up to 7 years. The only good news is they will have less and less of an overall effect on your scores as time passes.
If you've just found out about a collection on your credit reports, the first thing I recommend is visiting our Credit Talk Forum and posting detailed information about your situation. There are many ways to approach dealing with a collection agency, and our experts can help you choose the right path to take.
So don't panic, call the collection agency, and simply pay it off. Do your research first, and make sure you do everything possible to limit the effects of the collection on your credit scores over the long haul. Trust me—it'll be worth the extra effort.
Photo by Sean MacEntee
I feel like I've answered this question hundreds of times over the past 8 years as I've moderated our Credit Talk Forum. But when I was asked the same question last week by a close friend, it once again reminded me just how confused the average consumer remains regarding collections and how they affect credit scores.
When most responsible people learn of a collection that has popped up on their credit reports, they immediately panic because they know their credit has already taken a hard hit. So what do they do? They pick up the phone, call the collection agency, immediately pay off the debt, and then expect that everything will be fine going forwards.
Much to their dismay, when checking their credit reports a month down the road, they realize that the ugly collection remains and now simply reads that it is "paid". So what does this mean for their credit scores? And is a "paid" collection really any better than an "unpaid" collection?
No matter what anyone tells you, unless a potential lender is using the brand new FICO 9 credit score that completely disregards collections paid in full (most lenders do not yet), it's a BIG fat credit myth that paying off a collection account in full will improve your credit scores. In fact, most credit-scoring models still essentially treat a paid collection in the same way they treat an unpaid collection. They're both negative marks, and they will both really hurt your credit scores as they can remain on your credit reports for up to 7 years. The only good news is they will have less and less of an overall effect on your scores as time passes.
Are There Benefits to Paying Off a Collection?
In short, yes. If you're planning on applying for any loan like a car or home loan at some point in the future, human eyes will most likely look over your credit reports. When they see that nasty collection, they will look more favorably upon one that is paid than a collection that was left unpaid and is perhaps still bouncing around among collection agencies. The difference could mean getting approved for your loan or not.If you've just found out about a collection on your credit reports, the first thing I recommend is visiting our Credit Talk Forum and posting detailed information about your situation. There are many ways to approach dealing with a collection agency, and our experts can help you choose the right path to take.
So don't panic, call the collection agency, and simply pay it off. Do your research first, and make sure you do everything possible to limit the effects of the collection on your credit scores over the long haul. Trust me—it'll be worth the extra effort.
Photo by Sean MacEntee
