Should I Pay Off My Accounts in Collections?

Facing a collection account raises concerns about financial standing and creditworthiness. This article guides readers through identifying, verifying, and strategically approaching these accounts.

Identifying a Collection Account

A collection account represents a debt that has become significantly past due, typically after 120 days of non-payment to the original creditor. The debt is then transferred to a debt collector.

This debt collector can be an in-house department, a third-party agency, or a debt buyer. Once acquired, they may report the account to the major credit bureaus: Equifax, Experian, and TransUnion.

A collection account on a credit report indicates a defaulted debt and negatively impacts one’s credit score. This impact stems from the account being a record of missed payments, a major factor in credit scoring models.

The account remains on a credit report for seven years from the date of the first missed payment that led to the collection process, though its negative effect may lessen over time.

To identify collection accounts, obtain free copies of your credit reports from each of the three nationwide credit bureaus. Federal law grants you one free credit report from each bureau annually through AnnualCreditReport.com.

These reports provide detailed information, including the collection agency’s name, original and current balance, payment status, and original creditor. Regularly checking these reports allows you to recognize and understand any collection accounts listed. You can typically get immediate access to your reports online after verifying your identity.

Verifying the Debt

Consumers have a right to debt validation under the Fair Debt Collection Practices Act (FDCPA), which requires debt collectors to provide specific information about the debt. This validation process helps ensure that you are not paying a debt you do not owe or a debt that is inaccurate.

To initiate this process, send a written debt validation letter to the collection agency, ideally by certified mail with a return receipt requested. This provides proof of delivery and the date it was sent. The letter should request information such as the original creditor’s name, original account number, exact amount owed, and date of the last payment.

The FDCPA mandates that a collector send a written validation notice within five days of their initial contact, outlining the amount owed, the creditor’s name, and how to proceed if you dispute the debt. Upon receiving your validation request, the collection agency must cease collection activities until they provide the requested information.

Review their response to ensure all details match your records and that the debt is yours and accurate. If the agency cannot validate the debt, or if the information is incorrect, you may have grounds to dispute it with the credit bureaus.

Strategic Approaches to Collection Accounts

After verifying a collection debt, various strategic options exist, each with distinct implications for your credit standing. One approach is to pay the debt in full, which will result in the account being reported as “paid” on your credit report.

A paid collection remains on your report for up to seven years from the original delinquency date. However, some newer credit scoring models may ignore paid collection accounts or weigh them less heavily.

Alternatively, you might consider negotiating a settlement for less than the full amount owed. Collection agencies often purchase debts for a fraction of their face value, leaving room for negotiation.

If a settlement is reached, the account will be reported as “settled for less than the full amount,” viewed less favorably by lenders than a paid-in-full account. This option is beneficial if paying the full amount is not feasible, as a settled account is preferable to an unpaid one.

Choosing not to pay means the account remains on your credit report as an unpaid collection for the full seven-year period. This can continue to negatively affect your credit score and financial opportunities, as lenders often view unpaid collections as a higher risk. A collection account can cause an immediate drop of 50-100 points or more in your credit score.

Executing Your Payment or Settlement

Once you decide on a strategy, whether paying in full or settling for a lesser amount, execute the agreement. It is important to communicate with the collection agency and obtain all agreements in writing before any payment is made.

This written agreement should clearly state the agreed-upon payment amount, payment terms, and how the account will be reported to the credit bureaus (e.g., “paid in full,” “settled,” or “paid-for-delete,” if negotiated).

For secure payment, use methods that provide a clear record, such as a cashier’s check, money order, or direct bank transfer, rather than providing access to your checking account.

Retain copies of all correspondence, including the written agreement and proof of payment, for your records. This documentation is useful should any disputes arise later regarding the account.

After payment or settlement, monitor your credit reports to ensure the collection account is updated correctly. While it may take a month or two for the change to reflect, the collection agency is obligated to report the updated status to the credit bureaus.

If the account status is not updated as agreed, you can dispute the inaccuracy with the credit bureaus, providing your retained documentation as evidence.