Is a Paid Collection Better Than an Unpaid One for Your Credit?

Having a debt that is being collected on can hurt your credit score a lot and make it harder to get loans and credit cards. But you have options when a debt collector comes calling. You can ignore it and leave it unpaid. You can also pay it, in full or in part. This makes me wonder if paying a debt is better for your credit than not paying it at all.

The short answer is yes, paying a debt is usually better than not paying it. But it depends on a few key factors .

How Credit Scores Treat Collections

To really understand if paying a collection helps or hurts your credit, you need to know how it impacts your credit scores.

The two main credit scoring models – FICO and VantageScore – both penalize you for having collections on your credit reports But they treat paid and unpaid collections differently

• FICO scores continue to penalize you even after a collection is paid. The damage is already done.

• On the other hand, VantageScore will no longer punish you for a paid collection. Your score will improve compared to leaving it unpaid.

In this case, paying a collection helps your credit score more than not paying it. You don’t have as much of a reason to pay with FICO because you get hit no matter what.

Many lenders use FICO scores to make lending decisions. But an increasing number look at VantageScore. So paying collections can still help your credit, even with FICO models.

Other Benefits of Paying Collections

Aside from potentially improving your credit scores, paying collections provides other meaningful benefits:

• Avoids legal action: If the debt is still within the statute of limitations, the collector could potentially sue you over it. Paying it eliminates this risk.

• Stops debt from being resold: Collectors constantly buy and sell debts. Paying it prevents your debt from being passed around endlessly.

• Prevents additional fees: Collectors can charge you interest and fees. Paying it early minimizes these extra costs.

• Makes you look better to lenders: Even with FICO scores, having a paid collection looks better than an open unpaid collection to lenders reviewing your application.

So even if your scores don’t change much, it can improve your chances of approval.

When to Pay vs Settle Collections

If you decide paying a collection makes sense for your situation, you have two options:

• Pay in full – This completely resolves the debt and prevents the collector from pursuing you further. If the account appears as paid on your credit reports, it can help your VantageScore.

• Settle for less – You can try to negotiate to pay a portion of the balance owed and have the collector consider it settled. But they may still report it as unpaid, limiting the credit benefit.

Paying in full is the best option if you can afford it. But settling for less might make sense if money is tight. Just make sure to get any negotiated settlement offer in writing from the collector before paying.

How to Handle Older Collections

Very old collections that are past the statute of limitations present another scenario. Collectors can still try to convince you to pay these debts. But they have little legal standing to force you to pay or sue you over them.

So at this point, you have leverage in negotiating a settlement. Paying an old statute-barred collection won’t help your credit much. The damage has already occurred. But settling it for less than owed makes more sense than ignoring it completely.

Just make sure any payment promises are in writing. In some states, even partial payment can revive the statute of limitations.

When Paying Collections Doesn’t Help

In some cases, paying a collection won’t accomplish much:

• If it’s a very small medical or credit card debt under $100, FICO and VantageScore already ignore these “nuisance” collections.

• If the original creditor plans to continue reporting it as unpaid, some of the credit benefit of paying is lost.

• If it’s an older collection that’s past the statute of limitations, paying it off won’t improve your credit much at this point.

Before paying a collection, dig into the specifics. Make sure it’s recent enough to still help your credit or prevent a lawsuit.

Other Ways to Improve Your Credit

While paying collections can help your credit, especially with VantageScore, it’s just one piece of the puzzle. Here are some other ways to rebuild and improve your credit over time:

• Pay all your current accounts on time going forward. Your recent payment history is very important.

• Keep credit card balances low. High utilization hurts your scores.

• Become an authorized user on someone else’s old credit card. It can give your credit a quick boost.

• Open a new credit card and use it responsibly. Having a good mix of accounts helps.

• Dispute and remove incorrect negative items on your reports.

• Write goodwill letters asking creditors to remove negatives. This sometimes works if you have a good recent payment history.

So try these steps in addition to paying collections to maximize how much your credit improves.

The Impact on Credit Applications

Will paying a collection help or hurt your chances of approval for a mortgage, auto loan or credit card? It depends on your entire credit profile:

• If the collection is recent and you have no other negatives, paying it may give you the boost needed to get approved if you meet other requirements.

• But if you have multiple collections and late payments, even paying them may not offset the overall credit risk you pose to lenders right now.

While paying collections should improve your approval odds in most cases, every lender weighs credit attributes differently. And it also depends on your income, assets, and existing debt obligations.

Paying collections is just one important piece of the approval puzzle. Focus on slowly building a positive credit history over time. Eventually you’ll get to a point where paid collections from years ago won’t make or break an application.

Should You Pay Collections or Not?

Here are some final tips on deciding whether to pay collections:

• Weigh the pros and cons. Will credit benefit outweigh cost?

• Can you negotiate a settlement for less? Even if scores don’t change, resolving it cheaply could be worthwhile.

• Make sure the collector removes the account if you pay in full and can provide proof.

• Don’t pay old collections past the statute of limitations without leverage.

• Paying helps, but have realistic expectations on how much your credit will improve, especially with FICO scores.

If you carefully consider all the variables – credit impact, legal risks, fees – the decision on paying collections should become more clear. Now you understand better whether a paid collection account is actually better than leaving it unpaid.