Article Summary | “Paying a collection item can increase or lower your credit score, but it won’t remove the entry without a further agreement. Understand the impact and take proactive steps for credit health.”
Dealing with a collection item on your credit report can be a stressful experience. Whether it’s a medical bill, credit card debt, or another outstanding obligation, the impact on your creditworthiness can be significant. Many consumers wonder what happens if they decide to pay for a collection item. Will it improve their credit score? How long will the collection item stay on their credit report? In this article, we will explore the consequences of paying a collection item and provide insights into how it affects your credit.
The Basics of Collection Items on Credit Reports
Before delving into the impact of payment, it’s essential to understand how collection items appear on credit reports. When you fail to repay a debt, the creditor may eventually charge off the account. At this point, the debt is often sold to a debt buyer or sent to a collection agency to work on a percentage basis. The collection agency then reports the debt to the credit bureaus, leading to the appearance of a collection item on your credit report.
Collection items are negative marks that can significantly lower your credit score. They indicate to lenders and creditors that you’ve had trouble managing your debts in the past. These entries remain on your credit report for seven (7) years, even if you pay off the debt. This seven-year clock typically starts from the date of the original delinquency.
Paying a Collection Item: What to Expect
1. Impact on Credit Score:
The impact on your credit score that paying a collection has depends on three factors
When the collection account was added to your credit report | The more recently added (let’s say if an account was added to the credit report in the last six (6) months) then less impact it has if you pay for the debt and it remains on your credit report. In this scenario, paying the collection will have little to no effect on your credit score. However, if a collection account has appeared on your credit report for a few years then paying the account and having it remain on your credit report could significantly lower your credit score.
How it will appear on your credit report after paying | It is best to have the creditor or debt collector agree to remove the account from the credit report for a payment. This is not always possible. If the account remains on your credit report after paying the creditor or the debt collection agency, then if the account is a new collection it may have a low impact on your credit score. If it is an old collection, then paying may have a significant impact on your credit score.
The version of the FICO® score that your lender is using | Not all lenders use the same version of the FICO® score or VantageScore®. The version of the score makes a big difference.
Mortgage Credit Scores
For instance, your mortgage lender uses versions FICO® 2,4,5. If there was a new collection item appearing on your credit report, then paying it would have little to no negative impact on your credit score for these versions of the FICO® algorithm. However, if the collection item has appeared for years on the credit report and the consumer settles the account, it could significantly lower the credit score for up to 12 months. This could mean that the consumer no longer qualifies for the mortgage loan.
Auto and Consumer Credit Scores
The more recent FICO® versions (after 8) and VantageScore® (after 3) will ignore a paid account. Meaning that if you pay a collection account and you are purchasing a car or applying for a credit card, the credit score should increase because it is similar to the account being removed from the credit report. If you are settling a collection item to obtain a credit card or buying a car, then a settlement can be a good idea.
2. Credit Report Status:
- Updated Status: Once you make a payment, the collection entry on your credit report should be updated to reflect the new status. It may show as “Paid,” “Settled,” or a similar designation.
- Doesn’t Remove the Entry: Importantly, paying the collection item does not remove it from your credit report. The entry will still remain for the seven-year period, but the updated status may be viewed more favorably by lenders.
3. Negotiating a Pay-for-Delete Agreement:
- Rare Practice: Some consumers attempt to negotiate a “pay-for-delete” agreement with the collection agency. In this arrangement, the collection agency agrees to remove the entry from your credit report in exchange for your payment.
- Not Guaranteed: It’s crucial to note that pay-for-delete agreements are not guaranteed, and many collection agencies may not agree to such terms. Credit bureaus may also discourage or penalize this practice.
4. Future Credit Applications:
- Lingering Impact: While paying a collection item is a positive step, it doesn’t erase the impact entirely. Lenders and creditors may still consider your past delinquency when assessing your creditworthiness.
- Creditors’ Policies Vary: Some creditors may be more lenient toward applicants with a history of paid collections, while others may still view it as a red flag.
Tips for Managing Collection Items
1. Verify the Debt:
- Validation Process: Before paying a collection item, request validation of the debt from the collection agency. Ensure that they provide documentation proving the legitimacy of the debt.
2. Negotiate Settlements:
- Negotiation Opportunity: Collection agencies may be open to negotiating settlements for less than the full amount. This can be an option if you are unable to pay the entire debt.
3. Keep Records:
- Document Everything: Maintain detailed records of all communications with the collection agency, including payment receipts and any agreements reached.
4. Understand Credit Scoring Models:
- Varying Models: Different credit scoring models treat paid collections differently. Familiarize yourself with the scoring model used by the lender you plan to apply to.
5. Monitor Your Credit Report:
- Regular Checks: Monitor your credit report regularly to ensure that the collection item is updated to reflect your payment. Dispute any inaccuracies promptly.
6. Rebuild Your Credit:
- Positive Behavior: Focus on positive credit behavior, such as paying bills on time and maintaining low credit card balances, to gradually improve your credit score over time.
Final Thoughts
Paying a collection item is a responsible step toward resolving your debt, and it can have positive implications for your credit score. However, it’s crucial to understand that the impact may be gradual, and the collection entry will still remain on your credit report for seven years. Take proactive steps to negotiate favorable terms, keep meticulous records, and continue to practice responsible credit management. While paying a collection item is a positive move, it’s just one part of a broader strategy to rebuild and maintain a healthy credit profile. If you have questions or need further assistance, please reach out to Xpert Credit Repair by Scheduling a Phone Appointment