One of the most insidious negative marks on a credit report is a collection account. Collection accounts can cause your credit scores to take a dive for up to 7 years from the date of the original account’s default. People who have collection accounts may want to pay them off but does paying off collections improve credit scores?
If you are trying to improve your credit scores or applying for a mortgage loan you may choose or be forced to pay off your collection accounts. But once a collection account lands on your credit reports it can stay for up to 7 years from the date of the original account’s default regardless of making monthly payments to a collection agency or payment in full to a collection agency. It’s a 7-year sentence.
When the 7-year date starts
A collection account can only remain up to seven years from the date of default on the original account. In other words, the clock starts to tick when you first become delinquent on the original account and no other payments are made. This starts what is referred to as the “Purge From” date. That “purge from” date does not change no matter how many times that account is transferred or sold to different collection agencies.
What happens when you pay a collection account
Paying a collection account does not remove it from your credit reports. It certainly looks better than an unpaid debt but it does nothing to improve your credit scores. Collection agencies can continue to maintain reporting of a paid collection until it has run its full course of seven years. Then it will be removed. The fact that the collection is paid will not undo the fact that the collection occurred in the first place.
Once more lenders begin to use the newest versions of both the FICO scoring model (FICO 9) and the VantageScore scoring model (VantageScore 3.0) paid collections will not be calculated into your credit scores. But for now, most lenders use FICO 8 scoring model or earlier, where paid and unpaid collections are calculated into your scores – making no differential treatment between the two statuses.
Solutions for Collection Accounts
The best strategy when dealing with collection agencies is to negotiate a mutually agreeable settlement amount and request a deletion once payment is made. Keep in mind collection agencies are under no requirement to remove a collection account from your credit reports once payment is made, but there are some that will work with you on a payment for deletion.
Most collection agencies will accept around 50% of what you actually owe as a settlement. And, some of them will actually set up payment plans. When paying a collection account, always request a deletion if you want to see an improvement in your credit scores.
Regardless of the credit score impact, you should pay or settle your collection accounts if they’re accurate. Ignoring debt collectors can leave you exposed to being sued by the collection agency if the debt is still under the statute of limitations. The statute of limitations determines how long the creditors/collection agency can sue you to collect the debt. This amount of time ranges from as little as 3 years to as long as 15 years, and varies by state.
If you have a debt that has expired and can no longer be litigated then it has become “time barred” debt. But if you make a payment or promise to make a payment on a time barred debt then you may have just restarted the clock and the collector/creditor may be able to sue you. This, however, has absolutely nothing to do with credit reporting. Once the debt reaches the 7-year reporting limit, it must be removed…forever.
A payment for deletion agreement can result in a collection account being removed from your credit reports once a payment is made.