It is well known that debt collections negatively impact your credit report. Any late account, including debt collections, can have a negative effect on your credit score as long as it is listed on your credit report.
Statute of Limitations on Debt Collection
After an account has been inactive for a long time, the debt becomes time-barred, and debt collectors can no longer sue you for it. If the statute of limitations on the debt collection has passed, you have a valid defense against the collection, but it is up to you to prove that the statute of limitations has expired if they sue you. Find out the statute of limitations on debt collection in your state to help you determine whether you should pay an old debt or not.
Ethical Obligation to Pay
If the debt is legitimately yours, the right thing to do is to pay it off. You have already consumed the goods or services that were financed by the debt, and it is your responsibility to pay for them. Can your employer skip paying a month’s salary? It should be the same for debts.
Will It Affect Your Credit Score?
The older the debt, the more negative impact it has on your credit score. Unfortunately, it is difficult to predict exactly what will happen to your credit score after paying off an old debt. Paying off an old debt may not impact your credit score, especially if several years have passed. The good news is that FICO states that paying off an old debt will not negatively affect your credit score, so that’s one less thing to worry about when paying off old debts.
Future Credit Card or Loan Applications
You may find it difficult to get approved for new applications as long as you have unpaid (negative) debts on your credit report. Or if your application is approved, you may not receive a good interest rate. If the debt is still listed on your credit report, it is wise to pay it off to improve your chances of getting approved for your credit card or loan. You need to keep in mind that paying off the debt will not remove it from your credit report (unless you negotiate a pay-for-delete), but it looks better than the alternative. On the other hand, if the debt will be removed from your credit report within a few months, it may be better to wait and let it fall off.
You May Need to Deal with Them Again
Regardless of credit scores and debt collections, you may have to pay an old collection if you wish to reopen an account with that company. For example, you may have an old cable bill that has been removed from your credit report and the statute of limitations has passed. If you want to reinstate service with that company, you will likely need to settle the old balance first.
Benefits of Paying Off Old Debt
You may be hesitant to pay off old debts because you prefer to spend the money on something else. However, there are benefits to deciding to pay what you owe. You do not have unpaid collections affecting your credit score. Paying off the collection account gives you points on the payment history portion of your credit score. Your debt-to-income ratio decreases. When you eliminate a debt, you reduce your financial burden and debt-to-income ratio. It is good for your overall financial health. Lenders and creditors will be more willing to extend you new credit when you have no outstanding obligations. Many lenders, especially mortgage lenders, require that you take care of all unpaid debts before they will offer you a loan.
Questions
Frequently Asked Questions (FAQs)
Will paid collections be removed from my credit report?
Even if you pay the amount due in full, it will still remain on your credit report. It usually takes seven years for it to be removed. However, after paying off the collection agency, this will be reflected in your credit report and score. This may improve your score and increase your chances of obtaining a loan, depending on the lender you use.
How can I start paying off old debts?
Paying off old debts and dealing with collection agencies can be overwhelming. Whether you are working alone or with a credit counselor, it’s essential to know how much you owe, to whom, and when the last payment date you missed was. From there, you can start making plans regarding how much you can afford to pay each time and when you can finish paying off the debt.
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Sources:
– Consumer Financial Protection Bureau. “What is a Credit Report?”
– Consumer.gov. “Your Credit History: What to Know,”
– Federal Trade Commission. “Time-Barred Debts,”
– Consumer Financial Protection Bureau. “My Debt Is Several Years Old. Can Debt Collectors Still Collect?”
– Consumer Financial Protection Bureau. “How Long Does Negative Information Remain on my Credit Report?”
– Federal Trade Commission. “Fair Debt Collection Practices Act,”
– MyFICO. “Collections – How to Manage Them and What They do to Your Credit,”
– Consumer Financial Protection Bureau. “Is It Possible to Remove Accurate, Negative Information From My Credit Report?”
– Experian. “Can Paying Off Collections Raise Your Credit Score?”
Source: https://www.thebalancemoney.com/should-you-pay-an-old-collection-960595
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