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If you are like most Americans, you've found a collection on your credit report at some point in your adult life. A collection is essentially a debt that you have owed long enough for it to go to an agency outside of your creditor. This process usually takes six months or longer to occur.
Most people understand that collections are certainly not helpful to a credit score, so they are inclined to pay them off. Before you consider doing this though, you need to see if making that payment will help or hurt your current situation. How could paying off a debt hurt your credit score, you ask? Let me explain…
When Collection Payments Hurt Credit
Collections can remain on a credit report for up to 7 years. The older they are, the less damage they do to your score. While it may sound logical to make a payment on an old debt, doing so may make it look recent, thereby giving it more weight on your score. In many cases, once the collection is paid off, the date of last activity is updated so that the debt's age fades away. This can lead to a frustrating decline in your current score.
Let's say you had an old medical collection from May of 2009, and you paid it off in January 2013. Your once four-year-old debt is going to appear to be very recent and very damaging to your score. Prior to paying it off, it may have only been having a minor impact on your score. Now, it will regain its strength and cause a big decline. Sure, the payoff itself will ultimately show up as something positive, but only after a drop you may not be thrilled with.
What You Can Do about It
You have several options to get around this unexpected credit decline. You could take your chances, pay off the collection, call it a day, and let time heal your score as the "new" collection begins to age. Another option is to negotiate with the creditor/collection agency to delete the collection in exchange for payment. Make sure to get everything in writing when you do this. If the collection is deleted, your score will benefit. Finally, if the collection is close to the 7 year mark, you can simply wait for it to fall of your report. Then you won't have to worry about it impacting anything at all.
As much as it sucks, sometimes doing the right thing is actually the wrong thing to do. Man, that was even confusing for me to write! Try to find ways to pay off your collections when they are young so you see minimal fluctuations in your credit score. If you work out your timing well enough, you should be able to get through your debt and improve your score all at once.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.