Should I Pay Off Collections on
My Credit Report?

I often speak to people who say that they have a collection account or other negative item on their credit report and want to pay the item off in order to improve their credit.  The assumption that many people have in this scenario is that by paying off the account, the item will be removed and their credit will improve.

Unfortunately, that is not the case.

The credit reporting system is set up in a bit of a counter intuitive process.

It would make sense that you would be rewarded with an improved credit score by settling your debt, however it actually has the opposite effect. Many people will see their credit score go down as much as 20-30 points simply by making a payment on a collection account which they owe. 

I'm going to introduce you to a better way to handle collection accounts so that your score actually goes up and the item is removed from your credit report, but before I do that – let's talk a little bit about what normally happens when you pay off a collection account.

The Two Year Rule

The first thing that you should understand is that 70% of your credit score has been calculated based on the past two years worth of your credit history.  While it is true that items usually stay on your credit report for seven years, if you were to pay any negative collection accounts today, it would generally take you about 2 years to have a good chance of getting new credit.

That means that no matter if every other item on your credit report was paid on time and you had low credit utilization on your credit card accounts – you could still have difficulty securing new credit, especially  any new credit with a really good interest rate.

What creditors look at when they review your credit history is how recent the last activity date on the account was and what the date of the last delinquency was.  The time frame when something should be removed from your credit report will greatly depend on the date of your last delinquency, (sometimes called the DOLD).

Even when you catch a late payment up or go ahead and settle a collection – once it has been marked as delinquent, creditors will know.  Usually, this type of item can stay on your credit report for up to seven years.

But there are a few exceptions to this rule.

For instance if there is a tax lien, it will remain on your credit report for seven years once the debt has been paid.

Bankruptcies on the other hand will remain on your credit report for a full ten years if it is a Chapter 7 or a full seven years if it is a Chapter 13.

Now Back to the Original Question…

Should You Pay Off Your Collections From Your Credit Report?

My answer is yes and no.

From a consumer perspective you have to consider your personal financial goals within a certain time frame.

• Are you looking to secure any new credit within the next 2 years?

• Is the collection account over a year old?

• Is the account held by the original creditor or has it been sold to a 3rd party collection agency?

My Advice

I almost always suggest to my clients that they dispute the collection item off of their credit report before doing anything.  Particularly if the account has been sold to a 3rd party vendor or if the account is over a year old, most of the time the collection agency does not have paperwork to support legal claim of the debt.  When those types of items are disputed, they generally fall off very quickly.

The other way to address it is to contact the creditor directly and let them know that you are open to settling the account however you will need for them to provide something in writing on their letterhead or from a company email address, stating that they will remove the item from your credit report upon collection of their payment.

This methodology works really well because most creditors just want to get their payment so they will make the concession with you in order to make sure that the payment happens. 

One thing to keep in mind is that if you decide to go this route you will not be able to come back and dispute the item – because you would be in essence validating that you owe the debt by stating that you will pay it.

With that being said, I recommend going through the dispute process with any collections on your credit report, but if you get stalled out you can contact the creditor and arrange to settle the debt.

Another thing to keep in mind is that paying a collection account that is within the last 6 months is not going to hurt your credit as much as paying off a collection account that is from a year or two ago.  Remember, the date of last activity for any negative accounts is what affects your score the most.  If you pay the collection off the date of last activity restarts and your credit score will take a huge dip again.

Knowing what to expect from your credit report is the first step to getting your credit to the place where you want it. The question of whether you should pay off your collection accounts on your credit report is completely up to you and your personal situation. 

I want you to realize that I am by no means suggesting that you do not honor your debt obligations.  I am however giving you an idea of the best way to manage your credit to optimize it and give you the results that you are looking for.