Paying a Collection Hurts Your Credit Score?

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This is a big question that many people have with regards to whether or not to pay their old debt off to the collection agency.

As a negative listing ages on your credit report, it negatively affects your score less and less.  What use to happen is that when you paid off an old collection your score would actually drop more.  This was because paying off the debt would make it appear as a new listing on your credit report and re-aging the length of time fot the negative listing.

Doesn’t seem really fair though, trying to pay off that old debt and it dropping your score more.  Because of this FICO has set up the new credit scoring model to be able to tell whether a paid off debt is still on old listing or is a new account.  So now even if you pay off this old debt it will make the listing still appear as the original reporting date.  The following are quotes from an article by Liz Weston which talks about this exact problem.

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Quirky credit scoring system

Thanks to the sometimes bizarre quirks of credit scoring, state statutes of limitations and the federal Fair Credit Reporting Act, consumers can’t always assume that paying off old debts will improve their financial situation or make them a better risk in lenders’ eyes. Add in the tactics of some unethical collection agencies, and you have a real quagmire.

The one bit of good news, though, is that what happened to Cynthia — a score plunge because of a new payment on an old debt — is much less likely to happen today. That’s because the company that creates the leading credit score, the FICO, worked with credit bureaus to iron out that particular wrinkle in the formula.

But there are still other problems that can arise:

  • Settling accounts for less than you owe can often hurt your credit scores.
  • Arranging a payment plan or even inquiring about an old debt can restart the statute of limitations in some states, allowing creditors to sue you.
  • Simply contacting a creditor about a past-due account can revive its interest in trying to collect, leading to harassment and hardball tactics.
  • Unethical collection agencies may promise to upgrade how your debt appears on your credit report in exchange for payment — then not follow through or make matters worse by making the debt seem more recent than it is……..

‘Settling’ an old debt can hurt your score

In the past, making any payment on an old, past-due debt could actually make matters worse because the action “updated” the negative mark in the eyes of the credit-scoring formula, making it look more recent than it actually was.

“Recency,” or how long it’s been since you’ve had a negative mark, matters a lot to your credit score. The more recent the problem, the more heavily it weighs against you.

In the last couple of years, however, Fair Isaac worked with the credit bureaus to change how new payments on old debts were reported, said Tom Quinn, the company’s vice president for scoring. Now, the scoring formula can distinguish between the new payments and actual new delinquencies.

“If you’re making a payment (on a past-due account),” Quinn said, “that will not negatively affect your score, in and of itself.”

You still can hurt your score, however, by “settling” an account for less than what you owe. Such settlements may get the creditor off your back, but the notation of “settled” on your credit report can sometimes be worse for your FICO score than just leaving the account open and unpaid, said Barry Paperno, a Fair Isaac manager.

“Settling the account can add a new element to its record at the bureau,” Watts said. “Since that element’s date would be more recent than the original item, it can end up lowering the score.”

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So as you can see it used to hurt your credit score to pay off that old debt in full.  Today though it shouldn’t affect your credit score.  Settling your debts however could be a problem for your credit score.  Also notice that contacting a creditor about that old debt can start the statute of limitations for collection once again.

Originally written for www.basiccreditinfo.com

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