It’s no secret that debt collections are bad for your credit report. Any past due account, debt collections included, can have a negative effect on your credit score for as long as it's listed on your credit report.
Potential creditors and lenders question your creditworthiness when they see collection accounts on your credit report, especially recent collections. Because of that, you might find it harder to get approved for new credit cards and loans.
If you’re working on repairing your credit, or just cleaning up your credit report, you might question whether you should pay a collection, especially if it's an old one. Here are some factors that play into your decision.
The Statute of Limitations
After an account has been inactive for a long period of time, a debt becomes time-barred, and debt collectors can no longer sue you for it. If the statute of limitations has passed, you have a valid defense against paying the collection, but it's up to you to prove the statute of limitations has passed if they do sue you. Find out the statute of limitations in your state help decide whether you should pay an old debt.
The statute of limitations varies from 3 to 15 years depending on your state and the type of debt.
Note that making a partial payment, a payment arrangement, or accepting a settlement offer on an old debt can restart the statute of limitations. Restarting the statute of limitations gives the creditor or debt collector more time to sue you for the debt. Payments do not, however, restart the credit reporting time limit which is seven years for most debts. By comparison, the credit reporting time limit is the amount of time a debt can be listed on your credit report.
A Moral Obligation to Pay
If the debt is legitimately yours, the right thing to do is repay it. You’ve already consumed the goods or services financed by the debt, it’s your responsibility to pay for it. Can your employer get away with withholding a month’s salary? The same should be true for debt.
For old debt collections, you can have the debt collector validate the debt, (i.e., send proof that the debt is yours) if you have doubts about whether the debt is legitimate. Your request for proof should be made in writing.
Will It Impact Your Credit Score?
As debts age, they impact your credit score less. Unfortunately, it's hard to predict what exactly will happen to your credit score after paying the old debt. Paying an old debt may not improve your credit score, especially if it's several years old. The good news is: FICO says that paying an old debt won't hurt your credit score, so that's one less worry about paying old debts.
Future Credit Card or Loan Applications
You may find it difficult to have new applications approved as long as you have outstanding (negative) debt on your credit report. Or, if you get approved, you may not get a good interest rate.
If the debt is still listed on your credit report, it's a good idea to pay it off so you can improve your credit card or loan approval odds. Keep in mind that paying the debt won't remove it from your credit report (unless you negotiate a pay for delete), but it does look better than the alternative. On the other hand, if the debt is going to drop off your credit report in a few months, it may be better to just wait and let it fall off.
You Need to Do Business With Them Again
Credit scores and debt lawsuits aside, you may have to pay an old collection if you want to open an account with that business again. For example, you may have an old cable bill that's fallen off your credit report and has passed the statute of limitations. If you want to re-establish service with that company, you'll probably have to clear up the old balance first.
Some utility companies may require you to pay a deposit in addition to the outstanding balance to re-establish services.
Benefits of Paying the Old Debt
You may not want to pay off old debt because you'd rather spend the money on something else. However, there are benefits to biting the bullet and paying what you owe.
- You have no unpaid collections influencing your credit score. Paying off a collection account gives you points in the payment history portion of your credit score.
- Your debt-to-income ratio decreases. When you eliminate a debt, you decrease your debt load and your debt-to-income ratio. It is good for your overall financial health.
- Lenders and creditors will be more willing to give you new credit when you have no outstanding obligations. Many lenders, especially mortgage lenders, require you to take care of all unpaid debts before they’ll offer a loan to you.