Will Paying an Old Debt Hurt My Credit Scores?

Perhaps you want to qualify for a mortgage but there are unpaid collection accounts listed on your credit reports and your loan officer says they must be resolved before you can get the loan. Or maybe you’re tired of getting collection calls about a debt that keeps getting sold to various debt buyers. Or quite possibly you just want to “do the right thing” and pay a debt you know you owe.

Will your credit scores drop just because you pay off a collection account?

The short answer is no. Paying a collection account should not lower your credit scores.

The reason consumers fear repercussions from taking care of one of these accounts is because they erroneously believe the credit score is most interested in the “date of last activity,” and a recent payment could make the account appear more recent. But in fact, the scoring model is likely looking at a different date here. Anthony Sprauve, senior consumer credit specialist for FICO/myFICO.com explains:

As far as the FICO Score is concerned, the algorithm dates collections from when the debt was assigned to the collection agency. Making a payment does not make the collection appear more recent as far as the FICO score calculation is concerned. The collection item on the credit report may show several dates, the date of the original assignment, the date the collection was paid, and the date the information was updated to the credit reporting agency. The FICO Score uses the date of the original assignment.

Factors to Consider

There are other things you should keep in mind when deciding how to handle a collection account on your credit reports:

1. Collection accounts may be reported for seven years plus 180 days from the date you first fell behind with the original creditor leading up to when the debt was placed for collection. (For practical purposes, that usually equates to seven years from the date it was charged off). After that time, the account may no longer be reported, regardless of whether it has been paid.

2. Paying one of these accounts won’t automatically remove it from your credit reports, nor it it likely help your credit scores, unless the lender is using a more recent version of the VantageScore 3.0 that ignores paid collection accounts when calculating scores.

3. Whether you pay it in full or settle it for less than you owe generally doesn’t matter in terms of your score. This means you are free to negotiate if you can’t pay the entire amount due, or if you think the collector has inflated the debt.

4. Paying or settling a collection account can prevent it from being sold to a new collection agency, which could result in multiple collections for the same debt on your credit reports.

Also, if you are considering paying an old debt, be sure to check the state statute of limitations that apply. (This will almost always be different than the length of time the account may be reported.) If a debt is “time barred” — or outside the statute of limitations — paying it may start the clock ticking again and make it possible for a collector to sue you for the balance. This could be a problem if the amount of the debt is large and you can’t pay or resolve it right away.

If you are hearing from bill collectors, be sure to check your free annual credit reports. You’ll want to make sure all the information they are reporting — including dates — is correct. You can find out how collection accounts affect your credit scores by using Credit.com’s free Credit Report Card. You’ll get two free credit scores plus a breakdown of the major factors impacting your scores.