Will Paying Off a Collections Account Improve My Credit Score?
Having debt is something that nearly everyone will have to experience at some point during their lives. While some people only acquire debt that they can afford to pay off, there are also those who end up getting in way over their heads. When this occurs, it is common for people to be unable to make payments on their mortgage, credit card, auto loan, or any other debt they might have accumulated.
Click here to learn how you can consolidate your credit card debt.
Unfortunately, if these kinds of debts go unpaid for a long time, there is a chance that a collections agency might be sent after you in order to try and get payment. Before we go any further into the article, let’s take a closer look at what collections accounts actually are and what they aim to do.
What is a Debt Collection Agency?
Debt collection agencies are hired by lenders and creditors who need help getting their money back from borrowers who have defaulted on their payments. This agency or individual will first send you a letter outlining that your credit account has officially been placed in collections and that you should start making payments again to avoid consequence.
What is loan default? Read this to find out.
Once they have sent the first letter and have waited a few days without a response, they are now legally allowed to start calling you to ask for payment and to provide you with all the information you need about your debt. Not only that, but if they are unable to reach you, they can also legally begin to call your friends, family, and neighbours. Don’t worry, this will only be to request your new address or phone number. If enough time passes and they can’t reach you or you refuse to make your payments, they can take legal action if they deem it necessary.
To learn more about the debt collection process in Canada, look here.
Another thing you might be curious about is when do collection agencies report to the credit bureaus? The answer to that question is a tricky one. In Canada, there are two main credit bureaus, Equifax and TransUnion. Both bureaus operate autonomously, so their policies and rules might not be the same. Also, the rules of what is allowed and not allowed for collections agencies to do will vary by province. For the best results, assume they will report your collection account as soon as they are legally permitted to, so pay your debts or agree to a debt settlement as quickly as you can.
Here are some important questions to ask your debt settlement company.
Will Paying Off a Collections Account Improve My Credit Score?
Just as everyone would love to be able to go through life without having to deal with a pesky collections agency, everyone would also love an outstanding credit score and credit report. Well, coincidently, one way to get closer to that perfect credit score is to actually pay off those collections accounts. So, to answer the question in the title, yes, paying off a collections account should improve your credit score over time.
Did your credit score drop recently? Find out why.
How Does an Account in Collections Affect my Credit Score?
This is because having unpaid debt (especially debt that has been sent to a collections agency), is one of the biggest credit killers out there. As long as these accounts are listed on your credit report, they will continue to have a very negative effect on your credit score. Because of this, you should always aim to pay off your debts, especially those that have gone to collections.
However, in addition to just paying off your collections account, you might also want to see if you can have it removed from your credit report. Without this step, your credit score might not improve as quickly you were expecting, as it will otherwise remain on your account for years. So, how do you remove paid collections from a credit report? Well, the answer isn’t too complicated.
How to Remove Paid Collections From a Credit Report
First, you should start by writing a letter to the collection agency or creditor and request that they speed up the process of removing that particular credit from your report. This letter should include:
- Reasons why you defaulted in the first place
- What sort of plan you have in place to reduce and pay off your debts
- A statement of your financial goals for the future.
While this is always worth a try, it isn’t always guaranteed to work, so be prepared for a potentially long process if they do not meet your request.
To learn how to remove collections accounts from your credit report with it affecting your credit score, read this.
What if I Decide to Not Paying Back my Debt?
Of course, you can also decide not to pay off your debts and they will be removed from your credit report in about 6 or 7 years, depending on which province you live in. While this is an option, it’s not one what we would recommend. It’s always in your best interest to pay back what you owe so that you know for sure you won’t have any issues with that particular account in the future.
Want to know more about how long information stays on your credit report? Click here.
Also, if the collections agency decides to pursue legal action against you because you’re not repaying your debts, a judge could begin to garnish your wages to pay them off. Generally, it is a much better idea to simply pay the collections account and request that the demerit is taken off of your credit report before things get much worse than they need to. Even if you are unable to get them to wipe the account from your credit report instantly, paying it off is still a step in the right direction.
Also, while paying off these old debts that have gone to collections will help, don’t expect them to completely turn your credit score and credit report from bad to great. Improving your credit as a whole takes a lot of time and effort in multiple areas, but paying off your collections accounts will at least ensure things don’t get any worse for you.
Tactics For Paying Off Your Collections Account
So, now that you know paying off your collections account is generally a good idea if you are looking to improve your credit, what is the best way to go about doing so? There are actually a few different ways you can go about doing this, which we will look at here. The three most common solutions are to simply pay the amount in full, to come up with a payment plan or to settle the debt for less than you owe.
Pay in Full
This is one of the easiest ways to quickly resolve your spat with a collections agency. Paying in full can help get the debt off of your back right away, so you won’t have to worry about it anymore. However, it can be difficult to scrape together enough money to make this happen, especially if the debt is large and your income is relatively small.
Create a Payment Plan
This option still gets your debt paid, but over a longer period of time and on a more affordable schedule. This will ensure that the debt is being paid off, but without you having to spend your entire life savings to do so. You and your debt collector should come up with a regular payment and schedule that will work for both of you. Of course, make sure you always make these payments and do not make a habit of missing them.
Settle The Debt
Your debt can become much easier to pay off if you are able to make a settlement with your collection agent. This essentially means that you agree to pay only a portion of the debt to wipe it off completely. Generally, the larger the debt and the longer it has been in collections, the higher the chance that the collections agent will be willing to strike a deal. You should also make sure to get everything in writing. These programs are beneficial as they can cost you less money. However, it can sometimes be difficult to agree on terms and may not look as good on a credit report as paying in full would.
How will debt settlement affect your credit? Find out here.
Depending on your unique financial situation, each option will have its own pros and cons, so it’s up to you to decide which is the best way to pay off your collections account.
Paying off your collections account will be a positive thing for both your credit score and credit report. Hopefully, these tactics for paying off debt collection also helped you to know which strategy to take on your way to a healthier financial situation.