February 2014 – Credit Tip: Regarding paying debts
A collection once paid will report as “paid collection”. It is still a derogatory mark on your credit file, but it is true that many lenders are less concerned about accounts that you no longer have an obligation to pay versus accounts that still have balances they are trying to collect. Since they are less concerned with these paid accounts, the chances we can have the credit score with all 3 credit bureaus (Equifax, Experian and TransUnion) remove paid accounts is higher than removing unpaid accounts.
Unfortunately, there are a few down sides to paying. One is that the date of last activity will update. (The date of last activity is based on when the last payment was made on the account or on the original account… whenever the last payment was). The date of last activity determines a few things:
1. how long the account can report on your credit file (7 years for negative accounts)
2. how long the creditor can take legal action to enforce payment (this varies by state)
3. how heavily the account weighs into your credit scores (the more recent the last payment the more heavily the account factors into the scores which is why it’s usually best if your open positive accounts have current monthly activity but your old collections are left alone… usually)
The benefits of paying are:
1. some loans cannot be approved if there is an unpaid collection still reporting
2. an unpaid account if deleted by disputing has a chance of re-reporting on the credit files again in the future
3. likewise, a paid account once deleted should never re-report to the credit files
4. a paid account has a higher chance of deletion through disputing than an unpaid account (though there’s never a guarantee it will come off)
5. it will lower your “total debt” which is a part of your credit score as well (based on all your positive and negative remaining account balances added up to one single number)
Please be aware that paying a collection does not cause it to be removed from the credit file. In fact, if the creditor takes payment from you and then actively requests the credit bureaus remove the account (essentially claiming it isn’t your account) it is considered extortion and they can be fined a heavy penalty from the Federal Trade Commission.
If it is paid and then disputed the creditor could choose to not reply to the dispute request though. They didn’t ask it to be removed so they don’t get in trouble for it, but it still comes off the credit files if not verified. So essentially everyone wins. They get their money and don’t have to spend time researching the account anymore, and you get it off the credit files. Again, there’s never any guarantees what exactly will happen though if paid. Some creditors will continue to verify persistently even once an account is paid and the account could remain for 7 years from the last payment date.