Maybe you’re tight on money this year and receiving a debt collection call from a collection agency like Fidelity Creditor Service is the furthest thing that you need during such a crisis. But, should you really just ignore them and forgo paying off your debt altogether?
What are the benefits of paying off debt collections? Are there even any? How about the downsides?
Find out below as we break down the advantages and disadvantages of paying your debt:
Reasons Why You Should Pay Debt Collections
Outside of the general moral obligations that come with a debt that you are legitimately responsible for, and the hit to your conscience that would come along with ignoring it, there are plenty of reasons why paying your debt would be to your advantage. It would:
- Positively impact your credit score
- Decrease your debt-to-income ratio
- Increase your likelihood of obtaining new credit
We’ve broken down each of these reasons in more detail in the following sections.
Collection Account & Credit Score
Before anything else, let’s define the term collection account. It is a term used to refer to an entry in your credit report that indicates that you have fallen behind on your payments — to the point that your creditor has transferred your account to a collection agency or sold it to a debt buyer.
According to the Fair Credit Reporting Act (FCRA), this mark on your credit file can stay on your report for up to seven years from your first delinquency date (the last time you missed out on making a payment.) And, as you might have guessed already, it can have a pretty big impact on your credit score (both for FICO®’s and Vantage Score’s credit reporting systems.)
Which is exactly what you don’t want to happen. A low credit score indicates to lenders that you fall into the category of ‘high-risk’ debtors—debtors that are unlikely to pay their debts. Which can make it very difficult for you to borrow money in the future when you need it, or increase the interest rate you will have to pay to borrow.
And so, to summarize, if you don’t want to mar your credit score, it’s always best to settle all the debts that you owe. After all, while paying your debt won’t necessarily lead to a higher credit score, it can help — if only in making sure that it doesn’t impact it too negatively.
Decrease Debt-to-Income Ratio
Again, let’s start by defining the relevant term, Debt-to-Income Ratio (DTI). It is a term used when comparing the total amount in payments you make to collections per month to your total income per month. As an example, you may be getting paid $5,555 per month and your total monthly debt is $3,222 per month, that would mean that you have a DTI of 0.58 or 58%.
Much like credit scores, it’s one of the factors considered by lenders when they are trying to decide whether or not to lend you money. Most lenders refuse to lend money to debtors who have a DTI higher than 43%. So, if we’re still following the example above, you would be out of luck. Unless, of course, you pay off your debt and decrease your DTI ratio.
Higher Chance of Obtaining New Credit
Both of the reasons listed above amount to one thing, really: you have a higher chance of being able to borrow money.
And, while that may not sound so important right now, making sure that your financial health is always in good shape will unlock many savings and benefits in your future, as well as access to much-needed loans and credit cards with terms that benefit you to the fullest extent possible.
Reasons Why You Should NOT Pay Debt Collections
The only real reason why you should NOT pay a debt is if it is not legally yours. If you have any reason to believe that you are being scammed or that the debt collection agency has gotten the wrong person, then you should inform the debt collection agency immediately, and if necessary, the proper authorities.
Other than that, there is no reason why you shouldn’t have to pay a debt. And yes, this is true even if you find that your debt is past the statute of limitation. Because, while expired debts make it impossible for you to be sued, you do still owe that debt.
In any case, the statute of limitations on debts varies based on the state you live in and the type of debt that you owe. But even should that time have elapsed, unpaid debts may remain in your credit reports because of the credit reporting time limit, which dictates how long negative items and information can stay on your report — according to the FCRA.
