(Ask a Question) I’ve been told that, paying off 2 small debts I have (one for $70, the other for $200) These are bills that I didn’t know about & have gone into collections (obviously, I rarely check my credit report) & just found out about them.
I was about to call up the collection agencies & pay them off, when my friend informed me not to, that it would only serve to diminish my credit score.
This seems contrary to logic (but then so does credit, to me). Either way, is my friend right? Am I better off, just not paying those two past due bills, since they’re both older than 3 years?
(Response) You are both right in this situation. I will try to explain how this could be possible, and what options you have to resolve your situation.
Historically, any action on an old collection account would bring it back into your current credit history, thereby having a negative impact on your credit scores. Your friend is accurate on this account.
However, the credit scoring updates commonly referred to as FICO 08 were supposed to eliminate the penalty on what would otherwise be expected to be a responsible consumer behavior. Paying off an old collection account should never diminish a credit score, and logically it should always increase your credit score since you are completely absolving an old default. Based on the announcement on FICO 08 from Fair Isaac, it would appear that your friend is now wrong given the new changes. The problem is that there really is not any definitive evidence that the penalty has been completely removed. We believe that there would be a very small (3-6 points maybe) increase in the average consumer’s credit score if they paid off an old collection account in full, but this would completely depend on other items on your credit history.
Ignoring the debts is a possible approach. They will fall off of your credit report 7 years from the default date, but only if you truly ignore them. Sending a $10 payment would restart the credit clock, thereby keeping the negative collection record on your credit report for 7 years beyond the recent payment. Furthermore, by sending a payment (or in some states even admitting that you owe the debt), the debt collector may restart the statute of limitations. This could open up judicial options for the debt collector on an old debt that may have previously become uncollectible. The statute of limitations varies by state and the type of debt, so it is important to determine what laws apply in your situation.
If you do choose to ignore the debts, understand that having unresolved defaults on your credit report may cause your denial of some credit transactions until the debts are either resolved or fall off of your credit report. For example, most mortgage lenders will require that you resolve any negative debt that could lead to a judgment prior to approving your mortgage application, even if your credit scores are sufficient for approval.
To effectively clean up old defaults, a different strategy is often recommended by credit experts. Using a pay for deletion agreement to negotiate removal of the debt can be the most effective solution in many situations. You may either repay the debts in full, or negotiate a reduced payoff (settlement). However, the primary objective is to have the debt collector completely remove the negative collection account from your credit profile.
You are correct that credit scoring can sometimes be a bit wonky. Even if you understand the basics of credit scoring and the individual scoring factors that make up your scores, you cannot fully predict how certain actions will be scored. Credit bureaus also incorporate “scorecards” into the mix, meaning that you are being compared to your “peers” based on certain characteristics. If your scorecard changes, then your scores could go up or down, and sometimes in direct contrast to the actions you have taken.
