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Dealing with debt is hard. And if you’ve ever dealt with a debt that’s been sold to a collections agency, you know the effect it can have on your credit. You’ve also probably wondered if paying off collections can improve credit scores. 

Debt is sold to a collections agency when a borrower had stopped making payments. The goal is to recoup some of the money. Either for the lender or for the collections agency. This depends on who owns the debt. 

Once your account is in collections, it’ll be noted in your credit report, which may impact your credit scores. If you’re concerned about an account in collections, we suggest you check your credit using a free service like CompareHub

Does Paying Off Collections Improve Credit Score In Canada? 

Paying off your personal debt is a good thing. But if your debt was sold to a collection agency, paying off that collection account doesn’t necessarily mean that your credit score will automatically improve. Even if that debt was paid off and settled, it will still appear on your credit report. 

In this case, lenders and creditors will still be able to see the collection account, which will likely sway their decision about whether or not to extend credit to you. And even if you are approved for a loan, you’ll probably be charged a higher interest rate.

Having said all that, it’s definitely a good idea to get rid of a collection account on your credit report.

What Happens When You Pay Your Collections Debt?

If you pay off the collection account, the credit bureaus should be notified by the lender. Once reported, the account should be listed as paid.

A collection account can remain on your credit report for up to 7 years from the first missed payment. If you pay off the account before this 7-year period ends, it may not have as much of a negative impact on your credit report. 

How Does Paying Off Collections Improve Credit Score In Canada?

As mentioned earlier, a collection account can have a negative effect on your credit score, even if it’s been paid. Collection accounts are reported to the major credit bureaus in Canada and noted on your credit report. When an account is in collections, the account will receive an R9 credit rating. This is the same credit rating you get when you file for bankruptcy.  

But the magnitude of the effect of a collection account on your credit score depends on the credit scoring model used to calculate your credit score. For example, some credit scoring models might not consider collection accounts when calculating your score. Other credit scoring models might treat different debt types differently as well, such as credit card bills versus payday loans.  

The extent of the collection account’s effect on your credit score also depends on what your credit score was before your account was sent to collections. For instance, if you had excellent credit, your score could be drastically reduced. But if you already had a poor credit score, the effect may not be as pronounced. 

In addition, the longer the collection account remains on your credit report, the less severe it usually impacts your credit scores.

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How Long Do Collections Stay On Your Credit Report? 

A collection account will stay on your credit report for up to 7 years, whether you paid the outstanding amount or not. As such, for 7 years, the account may negatively affect your credit score — and therefore your chances of getting approved for a new loan. 

On the bright side, the effect of your collection account usually gradually lessens as it ages. 

Can You Remove A Collection’s Account From Your Credit Report?

Yes, you can remove a collection entry from your credit report. In fact, getting rid of this entry is highly recommended. Having a collection account on your report may pull down your credit score, which can hurt your chances of getting approved for credit.  

To eliminate your collection account from your credit report, consider one of the following options:

Has The Debt Passed The Statutes Of Limitations?

Ask the agency for a letter to confirm the name of the original creditor, the amount owing, and whether or not the debt is still within the statute of limitations in your province or territory. If the debt has passed the statute of limitations, the debt collector can longer take legal action. Moreover, after 6 – 7 years, your collection account should automatically be removed from your credit report. 

Negotiate With Your Debt Collector

If the first two options are not feasible, consider a debt settlement to eliminate your debt. A debt settlement arrangement involves settling your debt with your creditors by paying less than what you owe. While this may not necessarily remove the collection account from your credit report, it will show that it’s paid, which can be good for your credit score.

What Happens If You Don’t Pay Your Collection Agency?

If you decide not to pay off your debts, your collection agent can decide to pursue legal action against you. If they do, a judge could give them the right to garnish your wages. Do note, that there are statutes of limitations on debt collection in Canada. Meaning, after a certain period, a lender or collection agency cannot pursue legal action against you.  Moreover, accounts in collection will disappear from your account after 6 – 7 years. 

How To Pay Off Collection To Improve Credit Score In Canada?  

There are a few different ways you can go about paying off your collections account. 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 debt with a collections agency. Paying in full can help get the debt off of your back right away. However, it can be difficult to scrape together enough money to make this happen, especially if the debt is large.

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 schedule that will work for both of you. 

Settle The Debt

Your debt can become much easier to pay off if you are able to settle your debts for less than you owe 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. 

Bottom Line: Paying Off Collections May Improve Your Credit Score In Canada

As mentioned, paying off your collections may improve your credit score, however, it greatly depends on the credit scoring model. When you pay off a collections account, the account will be listed as paid in your credit report. This can make your odds of getting a loan in the future higher than if it was unpaid. Future lenders would rather see paid collection accounts in your credit report than unpaid ones.   

Frequently Asked Questions

What’s the difference between a collection account and a charge-off?

A charge-off refers to an account that has been written off by the lender as a loss. Once this happens, the account no longer accrues any additional charges, but it can still be sold to a third party (ex: a collection agency). With a collection account, the original lender sells the debt to a collection agency to collect the outstanding debt from the borrower. If you pay the debt to the lender before the account is sold, you may be able to avoid having the collection account reported on your credit report. 

What should I do if my account has been mistakenly sent to collections?

The first thing you should do is reach out to the lender to try and rectify the situation. Alternatively, you can file a dispute with the credit bureau where the error was made. 

Will a collection entry stay on my report forever if I don’t pay?

No, your collection account will not stay on your credit report forever. It will eventually be removed from your report after the required amount of time has passed, which is typically 6-7 years. 

What can a collection agency do to me in Canada?

A collection agency has the legal right to contact you for payment. They may also take legal action against you by taking you to court. If they are unable to reach you, they can also legally begin to call your friends, family, and neighbours. But only for your contact information.
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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