“What will happen to my score if I pay off a collection?”
“What are the pros and cons of paying off a collection?”
“Can I pay off a collection with my tax return money, and would it increase my credit score?”
These are the most frequently asked questions during the tax return season. Consumers who have extra funds during this time will probably want to pay off their collections. But before you do that, see the pros and cons of settling your collections below.
Consumers who feel the need to have a “clean slate” will most probably be relieved if they were to pay off their collections. Besides, while the benefit of doing so is essentially psychological rather than a financial one, people still do it for the sake of achieving a peaceful mind.
Your scores might drop
When you make a payment on an old debt or a collection, it restarts the debt. Since the account now registers as a paid account with zero balance instead of just an old collection account, it causes your score to drop because recent derogatory marks considerably impact your credit scores.
It stays on your report regardless if its paid
The law does not require your creditor, lender, or collection agency to delete the collection mark. When you pay off an old collection, it restarts the debt and will register the account as paid with zero balance. So, in the end, paying it off won’t do anything good for your credit score.
Settled debts can be considered taxable income
There are some cases where consumers choose to partake in some settlement options. You also need to know that any amount of the debt not paid can be, and will be considered as canceled debt. So, you might have to pay taxes for the omitted amount of debt later, and you are more than likely to receive a 1099-C (Cancellation Debt Form) for the following tax season.
You are wasting your time and resources
The resources you are spending to repair your credit may do the opposite, and before you know it, you’ve run out of money to spend and you wasted your time for nothing productive.
So instead of experimenting, go to T and T Credit Counseling & Consulting, where experts can help you audit your credit report, remove the questionable items and help you achieve the score you deserve!