It’s no secret that debt collections are bad for your credit report. Any past due account, debt collections included, can have a negative effect on your credit score for as long as it's listed on your credit reprot.
Potential creditors and lenders question your creditworthiness when they see collection accounts on your credit report. You might find it harder to get approved for new credit cards and loans with collection accounts on your credit report. If you’re working on repairing your credit, or just cleaning up your credit report, you might question whether you should pay a collection, especially if it's an old one.
Is the Debt Still Valid?
After a certain period of inactivity on an account, a debt becomes time-barred and debt collectors can no longer sue you for it. This period of time is known as the statute of limitations on debt and varies by state. If the statute of limitations has passed, it's illegal for a debt collector to sue you. Find out the statute of limitations in your state. That may impact your decision to pay an old debt.
Moral Reasons To PayIf you’re liable for the debt, the right thing to do is repay it. You’ve already consumed the goods or services financed by the debt, it’s your responsibility to pay for it. Can your employer get away with withholding a month’s salary? The same should be true for debt.
Effects of Paying
Paying an old collection can lower your credit score in the short term. How does that happen? The older they get, the lesser the effect collection accounts have on your credit score. When you pay on an old collection account, it renews the date of last activity. So, your credit score could drop when you first pay an old collection. Fortunately, you’ll see your credit score come back up as time passes.
If the account is scheduled to fall off your credit report in the next few months, you might put off paying it until that happens. That way, you can avoid the initial drop in your credit score.
- You have no unpaid collections influencing your credit score. Paying off a collection account gives you points in the payment history portion of your credit score.
- Your debt-to-income ratio decreases. When you eliminate a debt, you decrease your debt load and your debt-to-income ratio. This is good for your overall financial health.
- Lenders and creditors will be more willing to give you new credit when you have no outstanding obligations. Many lenders, especially mortgage lenders, require you to take care of all unpaid debts before they’ll offer a loan to you.