Does paying off collection accounts help your cred?

Answer 1

• Why payoff collections when you have a bona-fide chance in getting the collection deleted by disputing it with the bureaus that are reporting it, as per "The Fair Credit Reporting Act". The original creditor already wrote it off as a loss on their taxes anyway and in most cases sold the debt to a collection agency for 15 to 20 percent.

• Last resort is to settle on the debt. Make sure you write a restrictive endorsement on the front of the check:"By cashing this check Payee agrees to accept this check in full payment of the account as agreed and agrees to remove all derogatory information from Remitter's Credit Reports."

• Now you have a canceled photo of your check in your bank statement as proof incase the bureaus don't adjust your report accordingly. Also make sure to mention your account number in the memo section.

• I agree with Bob in the next answer--since I am a mortgage loan officer--I would be recommending the same. Pay the collection at the closing of the purchase/refinance of the home--not right before. Your scores will not improve for a good 2 months or more as you just gave a bad account a newer date. I like to call it "new history". Now if you are just cleaning up your credit and not applying for any type of loan for at least 2 months, then by all means -- pay the amt due or settle on an amount. Either way get it in writing and keep your originals--for a LONG TIME. Send copies when sending the payoff/settlement. Act as a "collector" would, and call consistently when you are waiting for confirmation via fax with the original being mailed to you until you get it. Make sure you have names and extensions when you try to re-reach the person you talked to as you will more than likely end up talking to someone else.

• The reason for this is because, among other factors used to determine a credit score, the "date last active" will change on these collection accounts once they have been paid. It simply means the date the account (regardless of type) had any activity on it, whether it be a credit, debit, transfer, etc. Pretty straight-forward.

• So let me try to explain: Let's say you have a collection from a long-forgotten medical bill (probably the most common collection), with a last active date of 08/99, with a $500 balance. Because this is such an old, inactive collection, it's effect on your credit score has been greatly diluted by more recently active credit (such as your current mortgage, car loan, active credit cards, etc.), and is likely only lowering your score slightly. If you were to pay that collection off in an attempt to gain points, your efforts will have an opposite effect in the short-term. By paying off the collection, you will bring the last active date of the collection to the current month (now would be 10/03), and although it will now reflect a $0 balance, the fact that you have a recently active collection on your credit report is more derogatory than an old collection with a balance.
• My advice to you is, if you are applying for a mortgage or other large loan, do NOT pay off collections before hand! Usually, lenders will require these debts to be paid at CLOSING, and this is highly recommended.

• Now, after about 6 months, your scores will have recovered (depending on the number of collections you had to pay off), and in the long term, will be much higher than had you left the unpaid collections on your credit report. It's just the initial hit that hurts.

• I appreciate the above. But I want to emphasis it highlights that you *will* have to pay off the old debt anyway. Moreover, as noted that craziness in official scoring is true for maybe 6 months. And it is happening in what might be the more junior and mechanical part of the process of actually approving a loan... many more things will actually go into it.

• So, let's see, if I was a lender, now and 6 months (or even 5+ years)in the future, how trustworthy do you think I would comparatively rate these two, or desire them as customers:

1) He has not made payments on his previous promises. He still owes others money that he doesn't seem able to, or interested in, paying. He expects to pay me with his future wages. Other creditors want to get repaid, and will have a right to an amount that will continue to grow with fees and interest charges, so his past due balances are actually higher than he's telling me. I can require he pay off those old debts, but if he uses my money to pay those off, do I really want to be in the shoes of those he isn't paying now?

2) He seems to have had a tough period and missed payment obligations for some reason, (but that was XX ago / there is an explanation in credit file). Gotta' say s/he really wanted to stay responsible/honorable and worked through it, made good on his promise overall and paid them. He doesn't seem to owe others now, at least not more than he seems able to pay on what he's making....

• To be certain of how ill informed and absurd some of the above is...when saying that "The original creditor already wrote it off as a loss on their taxes anyway...", well maybe in a way. They wrote it off on their financial books too...they had reported an asset a receivable, (income they already reported and expected to receive), that wasn't real...they paid taxes on that income previously (when they originally made/recorded it)...both their books and tax accounting now get adjusted to show they won't receive it...the tax they get is tax BACK that they paid already on the income they aren't going to receive. You don't really think the IRS gives money back for something else do you?
• Can paid charges help your credit score. It can increase your credit score by paying off a charge off on your credit report.

UPDATE: In 2007, Fair Isaac agreed with debt collectors that a debtor should not be penalized for paying off old debt accounts. While it is true that renewed account activity could reset the date of last activity on a collection account, it does not change the date of last activity for the original debt. Furthermore, Fair Isaac claims that adjustments have been made in credit scoring that allow for a debtor to pay an old debt without any negative movement in their credit scores.

This settles a decades old argument that paying off an old liability demonstrates financial responsibility. What we do not know is whether the actual change to risk scoring models was made in 2007, or if it is part of the FICO 08 scoring update. Either way, by late 2008 debtors will not be penalized for paying off an old debt account. With this in mind debtors can pay off older accounts without fear of a negative credit score reaction. This is true for lump sum payoffs. Making a series of payments on an old debt is still not advisable. Still though, debtors should focus on newer debts, since older accounts may drop off their credit report before they get a chance to repay them.

Paying off a collection will update the account as more recent which will hurt your credit score, but it will also improve your debt to limit ratio which will increase your credit score. More importantly you can negotiate to remove the credit report listing upon final payment. You can also try to dispute the collection with the credit bureau and this becomes much easier once you have paid off the debt.

It is completely and utterly untrue that writing "this pays this debt in full" on a check is legally binding. Why wouldn't one do that on the first mortgage payment? I can write anything in the memo of a check, it means nothing. Please do not follow that advice. I worked for a bank for over a decade, this is a horrible myth.

Answer 2

"Should" is a misnomer in the context of this question. Some background information may clarify the issue.

All defaulted debts are due and payable in full immediately. If you have made payment arrangements, those arrangements are at the discretion of the creditor/collection agency. They are under no obligation to accept anything less than the full amount owed.

Creditors incur expenses to have data reported to the credit bureaus. It costs them to place a collection account on the bureau and costs them to update the balance. It is typical for them to update to a zero balance, but not unheard of for them not to update at all. This is an issue that consumer's should address when "making arrangements" and follow up on in their own credit reports.

So, while your collection may show payments being made, this would be unusual. It also would not benefit you at all. Not only would this signify that you defaulted on the original account, but that your attempts to pay later were not according to standard and ordinary terms either.

Instead of shooting for this goal, try instead to make certain the account gets updated to a zero balance once it does get paid off. Better yet, request that the account be deleted from your report upon payment. This may not happen, but is well worth requesting.

Answer 3

Negative information remains on a CR for the required amount of time, in most cases that would be 7 years.

When a debt is paid in full it will not be removed from the CR until the time limit has expired but it should be marked as "paid or satisfied".

Answer 4

Yes, if you have a bad debt reported to your credit listing and unpaid balance this hurts both your credit rating along with your balance between debt-to-income if you had been considering purchasing or refinancing a home. When you payoff this debt, the balance is changed to reflect that you have made this payment, which will improve your credit standing.

Answer 5

It will, as long as the collection's date of last activity is within the last 6 months. Paying a collection resets the date of last activity and may wind up hurting your credit score.

It is better to have an old collection with a balance than a new collection without a balance.

Answer 6

Not always. Paying a collection refreshes the date of last activity. The FICO algorithm considers the last 6 months of activity to be the most important which means that it has the most impact on a credit score. Paying an old collection puts that collection back within that 6 month period and lowers your credit score on many occasions.

The rule of thumb is Pay collections which are active within the last 6 months and do not pay collections which have been inactive for over 2 years. Use your best judgement for everything in between.

Answer 7

Answer

Paying of your debt in collection will hurt your credit score as it will show that your payment is not of the required amount and not in time.

Answer 8

No, actually a paid collection is just as bad as an unpaid collection, they both are negative information reporting to your reports

Answer 9

Yes its a very good thing to do!

Answer 10

Yes