I have a collection and a credit card with roughly the same balance. I received a bonus and I am able to pay off one of them completely. Which is more beneficial to pay off first?

  • is your credit card balance delinquent?
    – Hart CO
    Mar 18 '19 at 16:31
  • Do you care about your credit score or is this credit card all you'll need.
    – Tolure
    Mar 18 '19 at 16:32
  • 1
    No. I have always paid more than the min balance on time and have never been delinquent. The collection is from an old medical bill I thought insurance paid and was sent to the wrong address until I got an alert on my credit report that I had a collection. The credit card does have a hefty interest rate at 21%.
    – Jeremy
    Mar 18 '19 at 16:33
  • How close is the collection to running out the statute of limitations?
    – nanoman
    Mar 18 '19 at 16:34
  • @Tolure I am curious which will be more beneficial to my credit score. I feel it is a situation where paying off the credit card will help me in the short term by saving money paying interest, but the collection will benefit in the long term by improving my credit score.
    – Jeremy
    Mar 18 '19 at 16:35

I'm assuming you're in the US, answer will vary by country.

Even after your collection account is paid in full, it will remain on your credit report (for 7 years after it was initially 180 days late). The latest scoring systems FICO 9 and VantageScore 3 will not be impacted by $0 balance collection accounts. Older versions of each (still commonly used) didn't have this exclusion and your score could be impacted regardless of balance for the full 7 years of reporting.

On the other hand, a current high utilization rate is hurting your score, and costing you a fantastic amount of interest.

Which is more beneficial to pay off first?

The credit card is actively costing you interest (assuming ~$3,000 balance at 21% interest that's $52.50/month), while the damage from the collection activity has mostly been done. Pay off your credit card, get your budget in order and aggressively pay off the remaining collection balance next.

Utilization is a large part of your credit score (~30%), you might see a bigger bump in score from bringing utilization down (and keeping it down) than by bringing collection balance to $0. But even if paying the collection first did help your credit score more in the short-term, saving all that credit card interest will help you get on track financially.

  • In the comments OP stated. "...which will be more beneficial to my credit score..." I agree with your overall analysis.
    – Tolure
    Mar 18 '19 at 17:03
  • @Tolure Right, that's why I mention that the collection will continue to be reported regardless of balance, and that utilization is a big part of credit score.
    – Hart CO
    Mar 18 '19 at 17:07
  • Wouldn't dropping the utilization but maintaining (temporally) collections not change the credit score? The removal of the down force caused by utilization is still not enough to start increasing credit score due to the downward force caused by the collection. Wouldn't you need to first clear the collection for the credit score to even start moving (slowly if utilization is still close to max)?
    – Tolure
    Mar 18 '19 at 17:17
  • @Tolure Medical collections aren't part of utilization, so that portion of the score would be impacted. The collections have affected the score, paying them off will help under the newest scoring models but under older (still commonly used) scoring models the collection will have negative impact regardless of balance.
    – Hart CO
    Mar 18 '19 at 17:35
  • 1
    Thank you for the advice. I was not sure if my score would be drastically impacted by the collection being paid off, or if it is more beneficial to reduce my credit utilization. After some consideration I think this will be beneficial. Since the credit card balance is actually less than the collection balance I can put the remaining money into my safety net, and increase the amount I am paying every month to the collection balance.
    – Jeremy
    Mar 18 '19 at 17:38

Collection First

The collection is taking free swings at your credit score the longer it stays around.

A credit card tends to take swings if you miss a payment or get close to your limit.

Your credit score will survive and even increase with a credit card in use (paying min on time) but this collection is killing / killed your credit score.

I'd pay off the collection while keeping up with min payments on the CC. I would also recommend keeping your CC at less than 90% capacity.

  • Thank you for the insight. I was not sure which impacted my credit score more. A card with a balance close to maxing it out or a collection.
    – Jeremy
    Mar 18 '19 at 16:39

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