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Many consumers ask us about the pros and cons to paying of a collection with tax time being around the corner. Does Paying Off My Collections With My Tax Return Help?
Having a collection on your credit report can be stressful, especially if you’re thinking about applying for new credit. How will the lender or creditor view an old collection, especially if it has an owed balance? Will it increase your chances of getting approved or hurt your chances? Many consumers this time of year will consider using their tax return funds to take care of these old collection debts. Before doing so, here are some pros and cons of paying off old collections to ensure you are making the RIGHT investment.
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
It's also important to know that recent derogatory marks can cause your scores to drop. 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.
- 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 cancelled debt. If this is the case, you may have to pay taxes on the cancelled 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. MSI Credit Solutions has averaged a successful 50-80% deletion rate over 12 years.
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.
