"What are the pros and cons if I pay off a collection?"
"If I pay off this collection with my tax return money, will it help increase my credit score?
These are some of the commonly asked questions we receive around this time of the year due to tax return season. We know that having a collection account on your credit report can be stressful, especially if you are planning to apply for a loan or new line of credit. Since many consumers come across extra funds due to tax returns, and in some cases stimulus checks, many consumers will consider paying off collections. Today we will be covering the pros and cons to paying off old collections.
Pros:
- Clean Debt Slate
Consumers who feel anxious about their credit report do experience a sense of relief when “cleaning the slate” of their old credit issues. While it’s a psychological benefit and not necessarily a financial one, it’s something many consider doing for their own peace of mind.
Cons:
- Possible Score Decrease
When you make a payment on a collection the date of last activity is renewed. Since the collection now reflects as an updated account with a zero balance, instead of an older collection with a balance, the recent date of the derogatory item drops your score. It's important to know that recent derogatory marks have a major impact on your credit scores.
- Collection Mark Stays on Your Report
When a collection is paid, the creditor, lender or collection agency is not required to delete the collection mark. When you pay off an old collection your credit report is simply updated to a paid zero balance status. Additional comments of paid in full or settled for less than the owing balance may also reflect on your report, but the derogatory mark itself will not be removed. You will still have a collection mark on your credit report which still negatively impacts your credit score.
- Settled Debts Could be Considered Taxable Income
In some cases, consumers will opt-in for settlement options. It is important to note, that the amount that was not paid can be considered canceled debt. If this is the case, you may have to pay taxes on the canceled amount later and you will more than likely receive a 1099-C (Cancellation of Debt Form) the following tax year. To learn more about 1099-C, Cancellation of Debt Forms, check out our previous blog.
- Loss of Time and Money
The money you could spend trying to fix things on your credit report may do the opposite, so you’re out both the money and the time. This can potentially delay any financial goals you may be trying to reach.
So how can you improve your credit? We recommend auditing your credit report to ensure collections are reported 100% accurately. A study conducted by the FTC showed that 25% of consumers found errors within their credit reports. If you think there are any inaccuracies on your report or are unsure of what is reporting on your credit, it is highly recommended to consult with credit professionals such as MSI Credit Solutions.
MSI Credit Solutions leverages consumer’s rights and works on their behalf to remove questionable negative items from their credit report which results in an increase to your credit scores.
Call MSI Credit Solutions today at 866-217-9841 and receive a FREE consultation.
MSI Credit Solutions provides superior credit restoration and comprehensive consulting services that are reliable and affordable. For more information regarding our credit repair services, real estate services & lending resources, or to schedule a free credit repair consultation, contact us today at 866-217-9841.
*The information in this article has been provided strictly for educational purposes.
