So you’re ready to start rebuilding your damaged credit? That’s a smart decision. One of the first places that many consumers like to begin when setting out to rebuild their bad credit is by paying off or settling their collection accounts.
Unfortunately, eliminating your collection account balances may not have the huge impact on your credit score you’d expect. While paying or settling your outstanding collections certainly can be a good idea, it’s important to set realistic expectations as it pertains to your credit scores.
The Impact of Outstanding Collection Accounts
Collection accounts can certainly damage your credit scores — this is not breaking news. The reason collection accounts can be detrimental to your credit scores is the fact that credit scoring models like FICO and VantageScore heavily weigh the presence or lack of derogatory credit report entries in the all-important payment history category of your credit reports.
The impact of a single collection account is going to vary from person to person and from credit report to credit report. However, if a single collection account is added to an otherwise clean credit report, the negative score impact is likely to be severe. The best way to avoid the potential impact of a collection is to avoid the collection altogether.
The Impact of Paid Collection Accounts
While paying collection accounts is certainly a wise move — it protects you from further escalation on the part of your debt collectors, such as lawsuits — doing so likely won’t have the positive impact on your credit scores you might have hoped.
Zero balance collection accounts are still allowed to remain on your credit reports for seven years from the date of default on the original account. Unless you’ve negotiated a pay-for-delete settlement arrangement with your debt collector (a settlement that’s very difficult to achieve), your collection accounts will continue to remain on your credit reports even after you’ve taken care of your outstanding balances.
Since paying collection accounts doesn’t remove them from your reports, doing so will not erase the fact that the negative event occurred in the first place. You may have resolved the situation after the fact, but at some point you still failed to pay a lender according to the terms of your agreement — and that’s what credit scoring models will look at. Statistics clearly show that consumers with collection accounts are more likely to have problems paying their bills on time in the future, which is why FICO and VantageScore consider them in the first place.
It is worth noting that newer versions of the most commonly used credit scoring models will ignore paid or settled collections entirely when calculating your credit scores. And however the balance was eliminated — whether it was you paying it in full or settling the debt — the newer scoring models still ignore them. Specifically, FICO 9 and VantageScore 3.0, the newest versions of credit scores available from FICO and VantageScore, were designed to actually exclude paid collections from their scoring calculations all together.
However, since most lenders still currently use much older versions of the FICO scoring model, it will likely be many years before paying collections will have a positive impact on your credit scores.
Finally, despite the fact that newer scoring models will ignore the zero-dollar collections, if they’re still present on your credit reports then lenders can certainly build policies around the consideration of the negative entry, even if scoring models do not.
So again, the best way to avoid all of this mess is to avoid the collection in the first place.