If you have debt that has been referred to a collections agency, you have a black mark on your credit report. A delinquent debt such as this is called a charge-off. You can pay a charge-off, and your credit report should reflect this, but the item itself will remain on your report even after it's paid.
Charge-Offs
Most lenders or service providers pursue you for a debt until it is 120 days, or four months, overdue, according to Bankrate. At this point, companies may hand the debt over to a collections agency, and they will tell the credit reporting bureaus to record a charge-off on your credit report.
Length of Reporting
The note of the charge-off will remain on your credit report, like most other negative information, for seven years. If you pay the debt in full, it will be noted as a paid charge-off rather than an unpaid one, but it will remain on your report for the full seven-year period and will have a negative effect on your credit score. If the charge-off is older than seven years, but still appears on your report, you should dispute this with the bureaus and have it removed.
Effect of Payment
Paying a charge-off will not have a material effect on improving your credit score once the delinquent debt is noted. The mere fact that you allowed a debt to go more than 120 days overdue is enough to have a downward effect on your score. Only the passage of time will provide an improvement in your score, as the charge-off gets older in your credit history.
Why You Should Pay
You can't improve your credit score directly by paying charge-offs, but you can put yourself in a better light with lenders. If you are applying for a mortgage or other major loan, most lenders insist that you pay off any outstanding charge-offs that appear on your credit report. Doing so shows you are making efforts to correct your past mistakes and are serious about improving your credit history.
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