Viewing entries tagged

Is Settling My Debt the Key to Better Credit?


Is Settling My Debt the Key to Better Credit?

Let's face it, no one plans on having bad credit. Aside from a few bad apples, the vast majority of consumers never set out with the intention of acquiring debt and failing to pay it off according to terms. Instead, most consumers who develop bad credit do so as a result of some unfortunate circumstance such as a job loss, an illness, divorce, etc. Even those consumers who find themselves swimming in collection accounts as a result of poor financial planning typically do not realize that they have overextended themselves financially until they have already bitten off more than they can chew.

One of my favorite sayings is the HOPE4USA slogan, "Bad credit happens to good people all the time." The reason why this statement means so much to me is because it is 100% true. Whether a person is facing credit problems due to bad luck or bad decisions, that does not mean that he or she is a bad person. Everyone deserves a second chance.

Cleaning Up Past Mistakes

Unfortunately, when most consumers set out to begin cleaning up their past credit mistakes they do it wrong. I cannot count how many consumers have expressed their frustration to me over the years after they paid off a pile of old collection accounts and their credit scores remained low - often even lower than they were initially. The fact that most consumers fail to understand is that paying off or settling collection accounts generally will not do anything to improve credit scores.

Why Paying Collections Doesn't Raise Credit Scores

The FICO credit scoring models currently in use by lenders do not reward consumers for paying off collection accounts. Current versions of FICO are much more concerned with the fact that a collection occurred in the first place than they are with the balance of the account. In fact, a collection account will have virtually the same negative impact upon a consumer's credit scores whether the balance is $2,000 or $0. (Defaulted credit card accounts are typically the exception to this rule.)

The purpose of a FICO credit score, also known as the design objective, is to predict the likelihood that a consumer will become 90 days past due on any of his/her credit obligations within the next 2 years. Current FICO credit scoring models are built with the assumption that a consumer who had collection accounts in the past is still likely to be 90 days late on an account in the future. Therefore, the presence of a collection account - regardless of the balance - is going to have a negative credit score impact.

Change on the Horizon?

FICO 9, the most recent credit scoring model released by FICO was designed to treat $0 balance collection accounts very differently than they have been treated in the past. The new scoring model was built with scoring logic to completely ignore collections with $0 balances. The result? Consumers who settle or pay their collection accounts could potentially see a massive score increase under the new scoring model.

Before you get too excited it is important to realize that it will likely be many years before FICO 9 is widely adopted by lenders - if it is even adopted at all. Check out my previous article, "Why You Shouldn't Be Too Excited About the New FICO 9 Scoring System...Yet" for more details. If lenders are not using the new scoring model then it is impossible for consumers to see any benefit from the new scoring logic.

What Should I Do?

If you believe that the fact that settling your collection accounts will not likely help your credit scores is a good reason to ignore the accounts, you may want to think again. Unpaid collection accounts have the potential to come with a lot of nasty consequences. Lawsuits, judgments, and wage garnishments are a few of the unpleasant side effects that often accompany unpaid debts. Settling past due accounts can be a very smart move, though it may be advisable to consult with a reputable professional for help and guidance before you get started

Where to Begin

It is important not to become overwhelmed when you make the decision to begin trying to fix past credit issues. The best place to start is to get a copy of all 3 of your credit reports (and possibly your scores as well). You can access a free credit report from each of the 3 major credit bureaus every year at Credit scores are not free, but you can often access them as part of a free or inexpensive trial to a credit monitoring service. CLICK HERE to compare trial offers which offer 3-credit scores.

Once you have your reports, review them thoroughly for mistakes. Credit mistakes happen more commonly than many consumers realize. In fact, the FTC estimates that over 40 million consumers may have errors on their credit reports.

When reviewing accounts for errors remember that all aspects of the account (i.e. balance, date opened, date of last activity, etc.) should be correct. If errors are discovered you have the right according to the Fair Credit Reporting Act to dispute those errors. You can dispute credit errors on your own or with the help of a professional. CLICK HERE for a great, free Credit Repair Toolkit to help you get started or you can schedule a no-obligation credit analysis with a HOPE4USA Credit Expert.


Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at, a recognized credit expert on talk shows and podcasts nationwide, a contributor to the Wealth Section of Fort Mill Magazine, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE Facebook page by clicking here. 


Will Paying Collections Help My Credit Scores?


Will Paying Collections Help My Credit Scores?

Paying collection accounts is usually the first place people start when deciding to try to fix damaged credit reports. However, the idea that paying off a collection account will boost a consumer's credit scores is, unfortunately, usually very wrong.

FICO's credit scoring models (the brand currently used by most lenders) were designed to help lenders predict the likelihood of a borrower going 90+ days past due on a loan within the next 2 years. If a borrower is likely to go 90+ days delinquent on an account within the next 2 years then a lender will probably consider the borrower to be a bad credit risk. When you pay off an outstanding collection account, even if a zero balance is reported to the credit bureaus, that does not erase the fact that the delinquency occurred in the first place. Therefore, FICO scoring models will still  typically score you as a bad credit risk, even after you have paid off collection accounts.

It is the occurrence of the delinquency (aka the late payment) which lowers the consumer's FICO scores, not the balance on the collection account. The fact that the delinquency happened is not erased when a collection account is paid. To further illustrate this point, let me ask you a question. Would a $1,000 medical collection, a $100 medical collection, or a $0 medical collection lower your credit scores more (assuming they all were added to your credit reports at the same time)? If you guessed that the 3 collection accounts would likely have roughly the same impact upon your credit scores then you are 100% correct.

Additionally, paying a collection account could accidentally harm your credit scores further due to a deficiency within some older credit reporting systems which might penalize you for "recent activity" on a collection account whenever a payment is made.  Paying an older collection account, which hasn't reported any activity in several years, might make the collection account appear to be more recent in the eyes of these older FICO scoring models and could therefore potentially result in a drop in credit scores. The reason this occurs is because the credit bureaus will update the "date reported" field when the collection agency reports the new balance ($0 if you paid or settled the debt) and when the "date reported" becomes more recent it might damage your FICO credit scores.

However, you do want to exercise caution when it comes to collections since simply ignoring these obligations could come back to bite you as well. If you have a collection account on your report which you know stems from a real financial obligation and you know that the balance is correct, then it may still be in your best interest to try to settle the debt. Unpaid debt can potentially result in being sued, wage garnishment, and judgments.

Remember, if you owe a collection account, you can always try to settle it for a lesser amount and you can even hire a reputable professional to assist you. Paying 100% of the collection will probably not affect your credit scores any more positively than paying a 5o% settlement in full since the account is already derogatory. Neither scenario removes the collection account from your report, so do yourself a big favor and save yourself some money if you choose to settle any collection accounts. Finally, it is very important to always, always, ALWAYS get proof of the settlement and the satisfaction of the account in writing from the collection agency.

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars on various credit and financial topics. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

More Expert Credit Advice