Your credit history is important to your overall financial health for at least three reasons.
First and foremost, a bad score means higher rates when you borrow. Second, because a bad credit history can also impact other expenses, like your car insurance. And finally, lousy credit could also impact your ability to find work.
Is this fair? Debatable. But like it or not, it’s a fact. So it literally pays to keep track of your credit history and score and keep them in the best possible shape.
Which brings us to this week’s question:
My 23-year-old son has bad credit. We have read about working on improving his credit score on your site. He is starting to understand more about this now since I have been working with him. He has recently paid off a credit card that had been canceled. However, he also has two utility bills that are on collections from out of state. If he pays these off will it change his credit at all? Will it always affect his credit in the same way since it already shows up on his credit report? Is there any chance to have it removed if he pays?
Before we get to Karen’s questions, let’s review a TV news story about the shortest path to a higher credit score.
Now, let’s see how unpaid bills, otherwise known as collection accounts, affect your credit.
What accounts in collections do to your credit score
A few years back, I did a story about how specific negative actions can affect your credit score. Below is a recap. Keep in mind that a perfect FICO score is 850, and to get the best possible deals, depending on the lender, you’ll need 730-760.
- 30-day late: 60-110 points
- Debt Settlement: 45-125 points
- Foreclosure: 85-160 points
- Bankruptcy: 130-240 points
- Maxed-out card: 10-45 points
The higher end of the ranges above would generally apply to those with the highest scores (780) and the lower end to those with lower scores (680). Also important: The older the offense, the lesser the impact.
While I wasn’t able to get the specific point impact of accounts in collections, they’d fall somewhere between a 30-day late and a bankruptcy. Not good.
What paying off collection accounts does to your credit score
Because unpaid bills will devastate your credit score, logic would suggest paying them off would send it in the opposite direction. But not all is logical when it comes to credit scores.
According to the creator of the most widely used credit score, the FICO score, paying accounts in collections won’t help. Here’s what they say:
As far as your FICO score is concerned, two things are considered; has a collections appeared on your credit report, and when it was reported. So whether or not you pay your collections off is really a personal decision.
What FICO is saying here is that paying off a debt in collections won’t improve your score. One of the big three credit reporting agencies, Experian, agrees. Here’s what they say:
Paying the debt won’t necessarily help your credit scores. Accounts that get to the collection stage are about as negative as it gets. Only bankruptcy is worse. As a result, any improvement, especially right away, probably will be very minor.
In short, paying debts in collection won’t influence your credit score. It may, however, influence a lender who looks beyond your score to its source, which is your credit history. If you were a lender, which would you rather see in a borrower’s credit history – an account they paid years late, or one they blew off and never paid at all?
Then there’s your personal morality score, otherwise known as a conscience. When you borrowed money, you gave your word you’d pay it back. So barring a legitimate dispute, that’s exactly what you should do. Or, at least, that’s the way I was raised.
Now let’s look at some possible ways Karen’s son might get these negatives removed from his credit history.
You could try disputing it
The Fair Credit Reporting Act allows you to dispute anything on your credit history. Once you file a dispute, the Credit Reporting Agency, or CRA, typically has 30 days to investigate the item, which they do by going back to the agency or lender who put it on your report. If that agency or lender doesn’t respond, the CRA can’t determine the item is accurate, so they have to remove it. They are then required to notify the other CRAs so it gets removed with them as well.
You’re obviously not supposed to dispute items you know to be accurate, and I’m not advising you do so. But I can tell you, people do this. It’s kind of like pleading innocent to a traffic ticket, then hoping the cop doesn’t show up for court: automatic dismissal.
If the items causing problems for Karen’s son are accurate, they’ll most likely be verified, so this is a long shot. But it doesn’t cost anything to try.
Learn how to dispute items with Experian here, Equifax here and Trans Union here. While all these companies will try to get you to buy your credit history from them before filing a dispute, don’t bite. Get it free at AnnualCreditReport.com.
If you’re going to pay it, try to get something in return
Some negative marks in your credit history (like a foreclosure or tax lien) aren’t going away, but collection agencies and lenders may remove charge-offs or collection accounts if you negotiate with them.
Before you pay anything, write a letter to the creditor and ask to have the account removed or marked as “paid as agreed” in exchange for your payment. After the creditor agrees (in writing) to remove the negative mark, pay the balance.