Your credit report is a crucial source of information about your past financial habits that most lenders and creditors require before doing business with you. Unfortunately, evidence of past debt problems, such as a collection account, can adversely impact your credit score and your ability to qualify for new credit.
General Facts
Your credit report only displays general information about each of your accounts. For example, your credit report will reflect if you made your credit card payment on time and how much you owe, but lenders cannot tell what you charged simply by reviewing your credit file. Specific purchases and payments are private. Charges for collection agency payments, however, will appear on your credit card statement.
Significance
Just because a lender cannot see that you are paying a collection agency, that does not mean that your credit report does not contain evidence of your collection account. Collection agencies, as creditors, have the right to report their accounts to the credit bureaus --- and many do. If a collection agency reports your debt to the credit bureaus, it will not only adversely impact your credit score, lenders evaluating your credit report will see that you have an account in collections.
Time Frame
The Fair Credit Reporting Act does not permit collection accounts to remain within your credit files for more than 7 years. If you make regular payments to a collection agency for a debt that is more than 7 years old, no evidence of the debt --- or the fact that you originally left it unpaid --- will appear on your credit report.
Misconceptions
Many people believe that paying old collection accounts actually damages their credit scores because the FICO credit scoring formula grants greater importance to recent accounts. Prior to 2009, paying collection accounts caused them to "update" on credit reports -- -damaging the debtor's credit rating further. According to MSN Money, this no longer holds true. You can safely pay off an old debt via monthly payments to a collection agency without the debt negatively influencing your credit rating any further.
Considerations
Even though the charges you make to a collection agency won't appear on your credit report that does not mean you can safely pay an old debt with a current credit card. Collection agency policies differ, but many collection agencies refuse to accept any form of payment other than a check or bank draft. This provides the company with knowledge of where you bank that it can use to garnish your checking account if you stop submitting payments.
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