A collection refers to a debt that has remained unpaid for an extended period, leading the creditor or lender to transfer it to collection agencies. These third-party entities then contact you to recover the debt.
It is legally required to pay off collections debts to avoid potential debt-collection lawsuits, and lenders may be hesitant to approve future loans if you have a history of collections. Collections debts significantly affect your credit score as they are part of your payment history, which makes up 35% of your FICO® credit score. Additionally, these debts can remain on your credit report for up to seven years, regardless of whether you have settled them.
The impact of paying off collections on your credit score depends on the specific credit scoring model used by your lenders. The latest versions of FICO (9 and 10) and VantageScore® (3 and 4) disregard collections accounts with a zero balance. However, many lenders and creditors have yet to adopt these newer models, so even if you pay off collections, it may not immediately result in a positive score change. While some lenders may take note of your payment of collections debt when reviewing your credit report, influencing their decision to approve your loan, many others may not consider it.
Please note that credit scoring practices can vary among lenders, so it’s essential to communicate directly with your specific lender to understand their policies and how paying off collections may impact your credit score in your particular situation.
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