Dealing with credit card debt in collections can feel overwhelming. Whether its due to financial hardship, unexpected expenses or a moment of oversight, unpaid debts can lead to aggressive collection calls, damage to your credit score and a cloud of financial uncertainty. Thats why the conventional wisdom often suggests paying off all debts as quickly as possible to try and limit the repercussions.
However, the reality is often more nuanced. There are circumstances where paying off debt in collections is the smartest move, helping you rebuild your financial standing and avoid further complications. But there are also situations where it may be unnecessary or even counterproductive to do so and making the wrong choice about this type of debt can have serious consequences.
After all, if you pay off the wrong debt at the wrong time, you might drain your emergency fund or miss out on debt settlement opportunities. But if you ignore the right debt at the wrong time, you could face lawsuits or further damage to your credit score. As a result, its important to understand when to pay — or not to pay — to help you make the best decisions about your financial future.
Having a debt in collections can be stressful and damaging to your finances. You may be getting calls from collectors demanding payment. It likely shows up on your credit report hurting your credit score. With all this pressure, a common question is Should I just pay it off to make it go away?
The answer isn’t quite so simple, There are good reasons to pay off collections accounts in certain situations But there are also times when it may not make financial sense or could even hurt you in the long run
To decide if paying off collections is worth it for you, there are several key factors to consider:
How Paying Collections Impacts Your Credit
One big misconception about collections accounts is that paying them off will remove them from your credit report. This isn’t the case. Once an account goes to collections, it can stay on your report for up to 7 years, even if you pay it.
The good news is that paying can change the status from “unpaid” to “paid” on your credit report. Although the negative mark remains, having it show as paid looks better to potential lenders. Some scoring models, like VantageScore 3.0 and 4.0, stop penalizing paid collections so your scores may improve.
However, other models like FICO 8 still ding your scores for paid collections. And if the collections account is very recent, paying it quickly may not help your scores much initially. The biggest damage happens when it first goes to collections.
So while paying off collections won’t erase the credit damage, it can start to diminish it over time. If you’re applying for a mortgage or other loan soon, resolving collections can help improve your chances of approval.
Avoiding Legal Action
If you have an unpaid collections account that is still within the statute of limitations, the collector or original creditor can potentially sue you for the debt. If they win a judgment against you, they can then pursue legal actions like garnishing your wages or putting liens on your property.
By paying off the collections account – either through settling it or paying in full – you can avoid court proceedings or stop them if they’ve already been initiated. This is especially important for more recent debt that is well within the time period collectors have to take legal action.
Paying collections to avoid possible lawsuits or other legal hassles can certainly be worth it financially and reduce stress. Just be sure it is a valid debt within the statute of limitations first.
Stopping Interest and Fees
Even after an account goes to collections, many collectors add on additional interest and various fees over time. By paying it quickly, you can minimize how much extra you end up paying above the original balance.
Settling collections accounts for less than the full amount can also save you money compared to what you may eventually owe if fees and interest keep accruing. Stopping that debt growth by paying can be financially wise.
Improving Chances of Getting Credit
While collections hurt your credit, having an account marked “paid” looks much better to potential lenders than “unpaid.” It shows you took responsibility and resolved the debt.
Many lenders may approve you more readily if you’ve paid off collections accounts prior to your application. While it doesn’t remove the negative item, it demonstrates you’ve addressed past due debts and improves your credit profile.
Gaining Peace of Mind
Finally, for some people, paying off collections can provide a psychological and emotional benefit. The constant stress of dealing with collectors calling and damage to your credit can take a toll. Eliminating the debt gives you the peace of mind of having that burden lifted.
If you have the financial means, paying collections can be worth it for intangible benefits like reduced anxiety and increased financial control. Just be sure paying it off makes sense based on your overall budget and debts.
When Paying Off Collections May Not Be Worth It
While the reasons above make a case for paying collections, there are also times when it may not be the wisest financial move:
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If the debt is too old – If the statute of limitations has expired, paying or even acknowledging very old collections could revive the debt and make you vulnerable to lawsuits. Better to let sleeping dogs lie.
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If the debt isn’t yours – Don’t rush to pay collections you believe are due to identity theft or billing errors. Dispute them first.
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If you can’t afford to pay – Paying collections at the expense of paying rent or buying groceries obviously causes more harm than good. Explore alternatives if money is extremely tight.
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If you could settle for less – Hold off paying in full if you need time to try negotiating a settlement for a reduced payoff amount.
The bottom line is you have to look at your unique situation. Paying off collections accounts can be worth it, but also do your due diligence. Confirm the details, understand your rights, and make sure it aligns with your financial situation.
Tips for Handling Collections Accounts
If you’ve determined paying off collections does make sense for you, here are some tips to go about it strategically:
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Get debt validation before paying – Collectors must provide verification if you dispute the debt. Make sure it’s accurate.
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Comparison shop settlements – Different agencies may agree to different settlement amounts. Shop around.
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Pay in exchange for deletion – Some collectors will remove paid collections if you negotiate this. Get it in writing.
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Pay directly to original creditor – This avoids resetting the 7-year period if paid to a collector.
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Prioritize recent accounts – Paying newer collections helps credit scores faster since the damage is fresher.
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Request goodwill removal – You can ask credit bureaus to remove paid collections, but this is rare.
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Consult a credit counselor – They can help create a personalized plan for addressing collections.
Deciding if paying collections accounts is worth it requires weighing many variables. From credit impact to legal factors to your budget, the choice depends on your specific circumstances. With the right strategy, paying off collections can benefit your finances. But proceed carefully and thoughtfully to make sure it’s the optimal move.
When the debt is beyond the statute of limitations
Every state has a statute of limitations that limits how long a creditor can sue you for unpaid debts. If the debt is beyond this period, known as a time-barred debt, you can no longer be legally forced to pay it. Making a payment or acknowledging the debt can restart the clock on the statute of limitations, making you vulnerable to legal action. In this case, its better to let the debt remain dormant unless youre ready to settle it entirely.
When you plan to apply for a major loan
If youre gearing up to apply for a mortgage, car loan or other significant financing, paying off debt in collections can improve your chances of approval. Lenders scrutinize your credit report and collections accounts can be red flags indicating financial instability. While paying off the debt wont erase it from your credit report, it can reflect positively by showing that youve taken responsibility. Plus, some lenders might require all collections to be resolved before approving your application.
Paying Collections – Dave Ramsey Rant
FAQ
Will paying off collections improve credit?
Should I pay off collections or let it fall off?
It’s better to pay down, pay off, your bill before it gets to collections. But if you’ve waited till then and you receive a court document saying the company is suing you then make your appearance and pay it off. Your late payments will already be on your credit report and those won’t erase.
Is it better to not pay collections?
Yes, you should still pay a debt even if it has gone to collections. Here are a few reasons why: Credit Impact: Unpaid debts in collections can significantly harm your credit score. Paying the debt can help mitigate further damage and may even improve your score over time.
Is it better to pay off collections or settle?
It is always better to pay your debt off in full if possible. Although settling an account is typically viewed more favorably than not paying it at all, a status of settled is still considered negative.
Should you pay off collections?
Paying off collections can be a smart move for several reasons: Pros: Improved credit score: While paying off a collection account won’t erase it from your credit report, it can significantly improve your credit score. This is because paid collections are treated less harshly by credit scoring models than unpaid ones.
Does paying off collections improve credit scores?
For some credit scoring models, paying off collection accounts may improve credit scores. FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores. Should I pay off collections or let them fall off?
Will paying off a collection account affect my credit report?
Paying off a collection account will note the account as “paid” on your credit report, but the effect on your credit depends on the scoring model. Some credit scoring models ignore $0 balance debt collections and treat certain types of debt different from others. If you pay the account, it won’t be removed from your credit report, though.
What happens if a debt goes to collections?
When a debt goes to collections, your credit score will go down, but there are ways to improve your credit if it does. The collection account will stay on your credit report for up to seven years — even if you quickly pay it back. Lenders will be able to look at your credit report and see that your debt went to collections.
Does paying off a collection account increase your score?
Depending on the nature of the collection account and the model used to calculate your score, paying off a collection account could cause your score to increase—or it could have no effect at all on your score.
Will paying off an account in collections remove a negative mark?
Many people believe paying off an account in collections will remove the negative mark from their credit reports. This isn’t true; if you pay an account in collections in full, it will show up on your credit reports as “paid,” but it won’t disappear. In fact, you should expect it to remain on your reports for seven years.