Paying off Collections Account
Question
Upon paying off a collections account, will my credit score suffer if I settle in full versus paying in full? Also, upon paying off collections accounts, will the reporting collections agency remove the derogatory information or negative rating by not responding to a personal letter from me saying “this account has been paid and should not reflect a negative status, as it is affecting my ability to obtain credit”? What advice can you offer to have derogatory accounts be removed from my credit report?
Joseph D
Answer
Joseph
Great questions.
We recommend that you always satisfy your debts in some way. This is a great way to increase your financial health. In the long run, this should also improve your credit score. According to myfico.com, 30% of your credit score is made up by the amounts you owe on your debts. So the less you owe, the greater you will score in this area. Outstanding collections, judgments, tax liens should be satisfied in one way or another.
Unfortunately, in the short term, paying off these accounts either in full or by a settlement, may lower your credit score. The payment you make on these accounts will be more recent than your previous payments and will update the activity date. Your credit score weighs new activity, usually over the last two years, more than old activity.
Unless you negotiate for a deletion with your settlement, the creditors will not remove these collections accounts from your records. In fact, they could stay on your reports up to 7 years from the last date of activity.
As a part of your settlement negotiation, you could stipulate that the creditor delete the item in full from the bureau reports. Often times, the creditors will ask for a higher settlement amount to accommodate this request. If they do agree to this, it is recommended that you get the agreement in writing BEFORE you make your payment. Monitor your credit reports in about 90 days from your settlement to make sure these items have been removed from your reports. If they are not, mail a copy of your settlement agreement to each of the bureaus by certified mail asking them to comply with the deletion request. If this does not work, follow up with the collection agency to have them contact the bureaus again.
Good luck.
Thanks
Candice
Tags: Ask Candice, debt