Truth about Paying Collection Accounts and Credit Score

There is one thing most bankrupt people have in common—collection accounts.

However, it's been my experience that most bankrupt people want to do the right thing and pay off the account(s). Sometimes it just takes a little time. And when you do the right thing, you expect the collection agency to do the right thing, too—don't you?

Well, unfortunately, that's not always the case.

Paying off a Collection Account Doesn't Improve Credit Score

Even after you pay off a collection account in full, and your credit reports show that you've paid the collection in full and have a $0 balance, it won't help your FICO credit scores.

Here's why...

Any appearance of a collection account on your personal credit reports lowers your credit scores. Once the collection account finds its way onto your credit report, it's part of your credit history. Whether you pay it off or not is of little consequence.

Original Dollar Amount of Collection Account Doesn't Matter

Whether, the collection account is $100 for a severely overdue library book or $5,000 for 50 overdue library books—the end result is the same—your credit scores can decrease by the same amount.

This is a critical point. Many people think that because the debt is small, it can't possibly hurt their credit scores.

Wrong.

Everyone knows that late payments on your mortgage or car loan, which can be hundreds or thousands of dollars, will damage your credit. However, if you let even a small $70 amount go to a collection agency, and it appears on your credit reports, it can damage your credit just as much.

Bottom line: anything from a collection agency that appears on your credit reports is going to decrease your credit scores. So, become extremely vigilant in protecting your credit reports from this type of information appearing in the first place.

Check Personal Credit Reports for a Collection Account

It's a good idea to check your personal credit reports on a regular basis. When was the last time you checked yours? Now would be a good time. Go to www.myfico.com/12 and pay close attention to any negative items in the Public Records section.

Another option would be to subscribe to a credit monitoring service that allows you to monitor all activity on your three credit reports.

To Fight or Not to Fight...

If you want to win the credit scoring war, you have to know which battles to fight. The little battles over small dollar amounts are the ones you want to avoid. You're going to lose those...even if you're right. In my opinion, it's not worth the risk of lowering your FICO credit scores.

Here's an example of how a collection account can damage your credit. It comes from a Life After Bankruptcy subscriber in Marietta, Georgia.

She lived in an apartment with two other girls. They had all signed the lease. When they moved out, the apartment complex assessed them $300 in fees to cover damages to the apartment. Two of them sent in $100 each, but the third didn't bother.

When the apartment complex sent a letter to all three girls demanding the last $100, the girls ignored it.

You guessed it—it eventually showed up as a collection on all three of their credit reports. That collection, for only $100, lowered her Equifax score from a high of 720 to a low of 512!

This was years ago—and her score still hasn't fully recovered.

Wouldn't it have been worth it for them to swallow their pride and pay the last $100?

Other Items that Show Up in the Public Records Section

Other items that can show up in the Public Records section and are treated much like collection accounts by FICO scoring models are:

- Federal and state tax liens (released and not released)
- Judgments and satisfied judgments
- Bankruptcy

When any of these items show up on your credit reports, your FICO credit scores go down.

How much? There's no specific number, but your scores can easily go down by 100 points...or more.

Sure, if you pay off the collection it will show a $0 balance on your credit report. The problem is—from a credit scoring standpoint your FICO credit scores will go south regardless if the public record item is paid or not.

So the moral of the story is—once a collection account appears on your personal credit reports, you can't resolve it by paying it off. You're better off paying what you owe before it gets sent to a collection agency and shows up on your credit reports.

Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that helps people recover after bankruptcy. He has helped thousands of people obtain a credit card after bankruptcy with a fair interest rate.