Is it better to pay off collections or let them go?

Credit card debt issues are rapidly increasing nationwide, with more Americans falling behind on payments as the cumulative effects of inflation and high credit card rates strain household budgets. According to recent Federal Reserve data, credit card balances have surged past $1.21 trillion, and delinquency rates continue to rise. But for many borrowers, this financial pressure doesn't just mean missed payments. It also means accounts are progressing into collections at an accelerating rate.

When an account lands in collections, it can have lasting implications for your credit score, loan approvals and your overall finances. In turn, just a single collection account could have an immediate impact on everything from your ability to refinance your mortgage to qualify for apartment rentals to even some employment opportunities. Serious damage is already done at that point, so it makes sense for borrowers with debt in collections to question not just how to deal with it, but whether it makes sense to deal with it at all. 

So, what exactly should you do if your debt has landed in collections? Is it better to pay it off or simply let it go?

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Is it better to pay off collections or let them go?

Whether paying off collections helps you depends largely on what you're trying to accomplish.

If your goal is peace of mind, paying what's owed can feel like a weight lifted. You eliminate collection calls and remove the risk of being sued, assuming the debt is still within the statute of limitations to do so. And that alone can be worth it for some borrowers from a stress perspective.

From a credit score standpoint, though, paying off collections doesn't always deliver the boost people expect. Older credit scoring models treat paid and unpaid collections similarly. The account may remain on your credit report for up to seven years from the original delinquency date, even after it's paid. That means your score might not jump just because the balance is now zero.

Newer credit scoring models are more forgiving, though. Some versions ignore paid collections entirely, and others weigh them less heavily than unpaid ones. But lenders don't all use the same model, which makes results unpredictable.

Letting collections go can sometimes make sense if:

• The debt is small, old and unlikely to be pursued legally
• You're already several years into the seven-year reporting period
• You're not planning to apply for major credit soon
• You don't have the cash to settle without sacrificing essentials

That said, ignoring collections isn't a risk-free approach. Debt collectors can still sue for debts that fall within the statute of limitations and unpaid collection debt can derail mortgage or rental applications, even if your score is otherwise solid.

Learn more about your debt relief options here.

When other debt relief strategies could make more sense

If you're dealing with multiple collection accounts or balances that feel unmanageable, you have more options than just paying off what's owed or letting it age out of the statute of limitations. The middle ground — meaning settling the debt for less than the full balance — generally offers more flexibility than paying in full or doing nothing.

Debt settlement allows you to negotiate with creditors and debt collectors to pay a lump sum that's less than what you owe, often significantly less. A successful settlement can close the account permanently and reduce your overall financial burden. And, many debt collection agencies expect to negotiate, particularly if the debt is older or already charged off by the original creditor. 

It's also worth noting that pay-for-delete agreements sometimes come into play during settlement negotiations. In these cases, a debt collector agrees to remove the account from your credit report once payment is made. They're not guaranteed, and policies vary by agency, but when successful, they can deliver more immediate credit relief than simply paying an account in full.

Another potential benefit to this approach is control. Instead of deciding whether to pay or ignore collections one by one, debt settlement lets you approach the situation holistically, as do many of your other debt relief options. This can be especially helpful if you're behind on multiple accounts or juggling other high-rate debts.

For example, debt management via a credit counseling agency may also be an option if collections are mixed with current accounts. While these programs typically don't reduce principal balances the way settlement can, they do reduce interest rates and fees and may help prevent additional accounts from slipping into the hands of debt collectors, which can matter just as much as dealing with old ones.

And, other options could make sense, too, like debt consolidation. With that approach, you roll all of your debts into one fixed-rate loan, ideally with a lower interest rate. This streamlines your monthly payments and, in many cases, can reduce the total interest you pay on your debt. 

The bottom line

Collections don't disappear just because you ignore them, but paying doesn't always deliver the payoff people expect either. Taking the time to weigh these approaches and your other options can make the difference between simply closing an account and actually moving your finances forward. If your collection debt is part of a larger debt problem, broader debt relief strategies, whether you're settling, consolidating or opting for debt management, may offer a more effective path.