Will Paying a Debt Collector Hurt My Credit?

Having an account in collections can be stressful and worrisome, You may be wondering if paying off the debt will help or hurt your credit scores, The answer is – it’s complicated, Paying a collections account can help your credit situation in some ways but may not provide the boost to your scores that you might expect, Let’s break it down,

How Collections Accounts Impact Credit Scores

When an original creditor sells your past-due account to a collections agency, it negatively impacts your credit score significantly. Payment history is a significant part of your FICO score, and collections fall under this category. A collections account on your credit report is one of the most negative things that can appear.

The initial hit when the debt goes to collections is severe. One collections account could instantly drop your scores by 100 points or more. The impact lessens over time, but remains for years. Collections stay on your credit reports for 7 years from the date the account first became delinquent.

Will Paying It Help Your Credit Scores?

This is dependent on two things: the scoring model used and the collector’s agreement to remove the tradeline from your credit report.

Scoring Model Differences

The main credit scoring companies, FICO and VantageScore, treat paid collections differently:

• FICO 8: This widely used model still penalizes paid collections.
• Newer FICO models: FICO 9, 10, and 10-T ignore paid collections.
• VantageScore 3.0 and up: These also disregard paid collections.

You might be able to improve your scores with your lender if they use newer scoring models if you pay off your collections. But a lot of people still use FICO 8, which still counts paid collections against you.

Getting Collections Deleted

The best thing that could happen is that you can negotiate a “pay for delete” agreement to get the collection account taken off of all of your credit reports. In exchange for your payment, the collector must agree to delete the tradeline.

If the collection is deleted, it’s like it never happened as far as your scores are concerned. However, collectors are not obligated to remove accounts when paid. Asking them to delete in exchange for payment is your best bet for a credit score boost.

Other Benefits of Paying Collections

While paying off collections might not lead to a big credit score improvement, it can still help your situation in other ways:

• Prevents legal action: If the debt is still within the statute of limitations, paying it keeps the collector from potentially suing you.

• Stops debt recycling: Collectors buy and resell unpaid debts frequently. Paying it prevents the account from being resold multiple times and complicating matters.

• Avoids additional fees: Collectors can continue charging interest and fees on unpaid debts. Paying it early limits how much you owe.

• Shows responsibility: Having the account marked “paid” on your credit reports demonstrates you took care of it.

• Makes credit more accessible: Lenders may view you more favorably when applying for a loan or card if collections are paid.

So weigh the pros and cons of paying collections vs letting them fall off your reports over time. Paying can be beneficial, but don’t expect a big automatic boost to your credit scores. Get any pay for delete agreements in writing first.

Tips for Dealing With Debt Collectors

If you have an account in collections, keep these tips in mind when interacting with collectors:

• Verify the debt – Make sure you actually owe the amount claimed before paying. Debt collectors often pursue the wrong people for debts not theirs.

• Know your rights – Collectors must follow fair debt collection laws on when they can call and what they can say.

• Dispute errors – If the debt amount or details are wrong, dispute it quickly in writing and ask for validation.

• Negotiate – Try to negotiate a pay for delete agreement in exchange for payment. Get any deal in writing first.

• Explore alternatives – If unable to pay in full, ask about payment plans or discounted settlements. Weigh pros and cons of other options like debt consolidation.

• Consult a pro – For complex cases, get guidance from a nonprofit credit counselor or attorney on the best approach.

The Bottom Line

Having a collections account hurts your credit scores substantially at first, but the damage diminishes over the 7 years it can remain on your report. Paying the collector may help in certain scoring models but won’t provide an automatic boost unless you also get the account deleted through a pay for delete agreement. While it may not solve your credit woes, paying collections still has advantages in preventing legal action, additional fees, and debt recycling. Deal carefully and knowledgeably with collectors to resolve the situation in the way most beneficial for your unique circumstances.