Collection accounts within your credit file are always considered derogatory by the credit bureaus and, according to the Fair Credit Reporting Act, will remain for 7 years from the date you originally defaulted on the debt. Depending on the arrangement your creditor holds with the collection agency, paying your creditor may prevent a collection account from ever appearing on your credit report.
Types
Creditors have the option to either charge-off a debt and sell it to a collection agency or maintain ownership of the account and pay the collection agency a percentage of however much the company can successfully collect from you. The type of arrangement your creditor holds with the collection agency will impact how paying the account affects your credit report.
Significance
If your creditor sold your account to a collection agency, the creditor can no longer accept payment on the defaulted debt due to the fact that it no longer owns the debt. Thus, as the debt's owner, the collection agency reserves the right to update your credit report accordingly. If your creditor only assigned the debt to a collection agency for recovery, you can pay the original creditor. Doing so, however, does not erase any derogatory report the collection agency has already made to the credit bureaus.
Misconceptions
Many consumers believe that their debts are held by a third-party collection agency when, in fact, the debts are merely in "collections." Most creditors have a collection department within the company that takes over recovery responsibilities for unpaid accounts before selling or transferring them to an outside agency. Should you submit payment on an account held by a in-house collection department, only the original creditor's report will appear on your credit file.
Features
Missing payments on a debt to a creditor will result in the creditor reporting the missed payments to the credit bureaus. Should the creditor subsequently charge off the debt, this fact will also appear within your credit files. Missed payments and charge-offs are considered negative entries by credit scoring formulas and damage your credit rating. Thus, your creditor doesn't have to transfer the debt to a collection agency for your credit rating to suffer as a result of not submitting payment on an account.
Considerations
Paying a collection agency doesn't necessarily mean that the company will report the debt to the credit bureaus. Many collection agencies provide consumers with a window of time in which to pay off the defaulted debt before the company formally reports the account. If a collection account already appears on your credit report, some collection agencies will agree to remove the derogatory entry in exchange for payment.
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