Does paying a collections account help your credit score?
Falling behind on payments damages your credit score. If you still delay the payments, the additional charges or penalties make it further difficult. Here, lenders send your debt to collection firms. Collection accounts appear on the credit report for at least 7 years. It reveals your financial history to the next lenders you reach for the minimum loan amount.
They could see the pending debt payments and the total debt amount you owe them. It may appear as a red flag to lenders who check your credit history/report before approving a loan. Consequently, they may reject the loan application.
Let’s analyse the debt collections.
What does it mean to have debt in collections?
When you have a debt in collection, it means -the original loan provider sends your credit report to a debt collection agency. Lenders can transfer debts like- credit card pending payments, payday loan default, and student loan default to the debt collection agency.
It does not do so immediately after defaulting on the loan. Instead, the lender grants you 30-180 days (depending on the finances and pending amount) to clear the debt payments. They may send you a notice to clear the dues if you can’t. If you fail, they contact the debt collection agency to deal with the matter.
The accounts in the collection appear on your credit report and impact your credit score. Analyse the ways to pay off debts quickly within the timeline. Otherwise, you may receive constant emails, calls, warning letters, and threats to clear the debt.
Paying at least some amount, if not full, is a good idea to refrain from constant chasing. It would reduce the debt amount but keep the debt collectors off your back. Thus, you can help your credit this way.
Does paying collections eliminate the negative mark from the report?
If you believe that paying off the collections would eliminate the negative remark from the credit report, then you are wrong. The negative mark stays on the credit report for 7 years, even after clearing the dues. Instead, paying the amount will appear as “paid” on your credit report.
It shows that your credit score may remain low unless debt stays on your credit report. The sharpest drop in credit score happens when the lender reports the debt to credit bureaus as in collection. However, the impact lessens after some time.
How much impact do the collections have on credit scores?
Collections are a critical part of payment history that makes up 35% of the credit score. Individuals with collections in their credit score share low credit scores compared to accounts without collections.
A collection amount higher than £100 (paid or unpaid) impacts the credit score for 7 years from the first missed payment. Thus, try to clear the debt within the timeline. If you are just a few pounds low, grab a bad credit instalment loan and pay the medical dues. It is an instalment loan that you can pay later in a fixed repayment amount by budgeting. It would help you avoid collection agencies and high penalties later. Moreover, it safeguards your credit score.
Apart from the pending amount, lenders also consider the debt collection frequency. For example, an individual with only a debt transferred to a debt collection agency is more reliable than someone with multiple debts under collection. Precisely, the potential to clear the debts is the critical factor that determines the impact on the credit score.
However, even the impact on credit scores diminishes over time, and debt collection will be nowhere to be seen on the credit file. The account in the collection remains on the credit report for 7 years.
Will paying a collection debt help the credit report?
Whether or not you should pay a debt in collection depends on your circumstances and financial conditions. If you want to pay it to improve your credit score and are worried about a lawsuit, you must consider the following aspects:
- Do you have medical debts of less than £500? If yes, you can write these off from the report. It would not affect the credit score.
- Medical debt impacts the credit score more than any other debt.
- You can avoid additional interest rates and penalties affecting the credit score.
As mentioned, medical debts impact the credit score the most in the case of debt collection. Thus, if the maximum amount comes from medical expenses, clear it now. Identify the savings and calculate the amount you can dedicate towards the payment.
For example- If your medical bill costs £7000, arrange for at least £4000. If you can, then you can finance the remaining sum with the help of £3000 loans for a bad credit score. What could be better than reducing the impact of debt collections on the credit score? This loan may help you with that. Moreover, you can improve your credit with regular payments on the loan.
Other reasons to pay the debt may be:
a) To stop legal action
The collection proceedings may hamper your lifestyle and even your wages. Paying off the debt would help you resort to the usual lifestyle with a lawful salary and avoid court dealings.
b) Restrain debt collectors from selling the account
Debt collectors usually buy and sell accounts. Thus, paying the debt will help you restrict the process and avoid the hassle. Imagine receiving constant calls from different debt collectors for the same thing. You can stop all that with a swift debt clearance.
c) Secure loans without trouble
If you want to improve your lifestyle by achieving your goals, paying the debt will help. Moving ahead with pending debt is not a sound decision. Moreover, a clear chit may help you get the loan with affordable terms.
Bottom line
Yes, you can clear the collection payments if you want to improve your credit score and stop legal action. However, it may take time to get the desired credit score. If you need help to overcome credit loss, contact your financial advisor. Given the conditions, he may help you decide whether you must go with the debt clearance.
Ailsa Adam is the Editor-in-Chief and former content head at Hugeloanlender. She has been a valuable member of the content strategy team since 2017 due to her abundant experience in the finance sector. Passionate about helping individuals navigate the world of loans and personal finance, she has dedicated herself to acquiring extensive knowledge on various financial products. Before her role at Hugeloanlender,
Ailsa worked as a seasoned journalist and writer, specialising in creating informative blogs and articles on diverse loan types. She is known for her meticulous research and commitment to delivering accurate and engaging content. She holds a degree in MBA Finance and has a keen interest in creative writing and art.
