Paying collection accounts in full can help, but might not improve credit scores

Dear Experian,

In the long run, will my credit be more positively affected if I pay off collection agency debt in full as opposed to accepting and paying a settlement amount?



Dear ATO,

When a collection account is involved, the initial difference between paying in full and reaching a settlement agreement likely will be minimal and there may be no impact at all on many credit scores.


A collection account is as negative as it gets, short of bankruptcy. The status of the collection account – whether it’s unpaid, paid or settled – will have little importance. What’s important initially is that you didn’t pay the original account as agreed. That will have a very serious effect on your ability to get credit.


When you settle a debt, you repay less than agreed under the original contract, which still shows you didn’t meet the terms of the contract. Therefore, a settled account is less positive than a paid account, which shows you repaid the total amount in full.


The debt – both the original account with a charged off status and the collection account – will remain on your credit report for seven years from the original delinquency date. The original delinquency date is the date the account first became late and was never again made current. The original account and the collection account will be deleted at the same time. The collection account simply represents a continuation of the same debt.


That timeframe is important. As the years pass, the status of the account could become more significant. Lenders may view a collection account that was paid in full as less serious as the years pass than an account that is settled or not paid at all. This is particularly true for the few lenders that conduct manual reviews or for mortgage loans.


Having a personal relationship with a local lender could prove beneficial. They would know from experience that you have managed your credit well after paying the collection account and might be able to take that into consideration, despite a poor credit score.


The result is that you could be approved for new credit sooner if you pay the account rather than if you settle the debt or don’t pay it at all. However, I must stress that the decision depends entirely on the lender.


Many people want to pay a bad debt as soon as they are capable as a point of pride.  That can be as important as the impact on your credit score.


Thanks for asking.


- The “Ask Experian” team

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