How to manage collection accounts?

[Mel]

I have a few collection accounts on my credit report that are 2-4 yrs old. What’s best for my credit – pay them off or just let them age off my report?

[TyrellK]

My advice is to ALWAYS pay off your debts. Here’s why:

When you ask “what’s best for my credit” you need to differentiate between your credit score and your credit standing.

Credit Score
Collection accounts most certainly lower your credit score. The Fico credit score formula weighs collection accounts according to when the collection occurred. The more recent the collection – the more negative affect it has on your score.

However, as far as your credit score goes it doesn’t matter if you pay collection accounts or not. Credit score considers only two factors:

• Has a collection appeared on your credit report
• When it was reported

Paid or not – the collection account has the exact same effect on your score.

Credit Standing
When you apply for new credit, your potential lender looks at more than just your score. Potential lenders DO pull your actual credit report. Unpaid debts look very bad and may certainly tip the lending decision against you. Often – potential lenders demand clients to first pay off old debts before approving them for new credit.

Other Considerations
The effect of collection accounts on your credit has nothing to do with your obligation toward your debts. Even if a collection accounts falls of your credit report – it doesn’t mean that the debt is erased!

Collection companies may file a lawsuit and get a judgment against you even if the debt no longer appears on your credit report. The time frame to bring lawsuit is governed by state laws (Statute of Limitations), and for most debts is longer than the 7 years reporting time frame.

Unlike the reporting time frame, the SOL clock is restarted every time you take an action with an account. Making a payment, making a promise of payment, confirming your debt, negotiating a settlement or entering a payment agreement can restart the SOL on an account to zero, no matter how much time had elapsed before the activity.

Conclusion
No matter how you look at it, it is my firm belief that collection accounts or any debt you’ve accumulated should always be paid off. You can try to negotiate a partial payment, but don’t just let them go unpaid. More about how to pay off debts here.

Hope this answers your question.

[Author]

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