Collection accounts affect your credit in various ways. Before deciding whether to pay a collection account off or not, you need to fully understand the effects it has on your credit score, credit standing and legal obligations.
Collection accounts are considered by the FICO credit score formula as part of your credit history, which accounts for 35% of your FICO score. Having a collection account on your credit report will lower your credit score. That’s common knowledge.
As with any negative information, Fico score weighs collection accounts according to when the collection occurred. The more recent the collection – the more negative affect it has on your score.
What’s less known is that as far as your FICO goes – it doesn’t matter if you pay collection accounts or not, because FICO considers only two factors:
- Has a collection appeared on your credit report
- When it was reported
Paid or Unpaid – collection accounts have the exact same effect on your FICO score!
Your credit score is but one amongst many other factors potential creditors weight when making a lending decision. When you apply for new credit, potential lenders look at more than just your score. They pull your actual credit report to see how you’ve handled past debts.
Unpaid collection accounts don’t look good when making lending decision, to say the least. Often, potential lenders demand clients to pay off old debts prior to approving them for new credit.
When a collection account falls off your credit report, it doesn’t mean the debt is erased! Credit reporting time frame has nothing do with your obligation to pay off your debts.
Collection companies may file a lawsuit and get a judgment against you long after the collection account aged off your report. The time frame to bring lawsuit is governed by the Statute of Limitations (SOL), which for most debts is longer than the 7 years reporting time frame.
Furthermore, unlike the 7 Yrs 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 restarts the SOL on an account to zero, no matter how much time had elapsed before the activity. So practically, a collection company can file a lawsuit many years after the account fell off your report.
If the collection company wins the lawsuit, as in so many cases, a judgment will appear on your credit report, negatively affecting your credit for another 7 years. Not to mention legal fees, interest and fines.
No matter how you look at it, it is always better to pay debts than to let them go unpaid. In the end – unpaid debts always cost more than paid ones. You can try to negotiate a partial payment, but don’t just let a collection account go unpaid. More about how to pay off debts here.