Dealing with a collections account can be a stressful ordeal, even for a borrower that is willing and able to pay out the account as soon as it is recognized. Just because a collections account gets paid out, doesn’t mean that it will leave the credit bureau right away, or even adjust to show the repayment.
Between the amount of time that the collections company actually takes to settle out the account, the time it takes for the bureau to update, and the time it takes for the bank to recognize the change, let alone the amount of time it takes for the record to completely disappear off the customer’s borrowing history. It is important for a borrower to take a couple of steps to ensure that they are clearing out their collections accounts as effectively as possible.
When a collections company first receives a payment for an account, it can take them as much as 1-3 months to settle out the funds, and have the credit bureau updated to show that the payment has been made. This means that a borrower might be stuck without access to new credit for that entire period, simply because the collections company isn’t in a hurry to get their accounts settled out. However, the collections company will issue a receipt of the repayment immediately, which is extremely valuable for the borrower. Banks will generally recognize that this repayment process takes time, and will accept the receipt as being proof of repayment. In most cases, this will allow the borrower to begin pursuing new funds that they would otherwise qualify for, even though the account is still showing as active on their credit bureau.
Once a credit bureau finally updates to show that a collections account has been settled, different banks will have a variety of policies in place for lending larger amounts of funds to the borrower. Usually, banks will not lend funds to customer with large collections accounts until they have been settled out for 2-3years. This means that a borrower might very well be stuck with small loans and credit card debts for a few years after clearing out a major collections account, simply to prove that the incident causing the write-off was isolated to that particular time period.
The best strategy for borrowers to pursue during this limbo-period is to make the most of what debt they already have access to, so as to rebuild as much of a credit score as possible. While banks have policies in place to prevent the issuance of debts to customers with seriously histories of delinquency, there is always a way to over-ride that policy for a customer that has managed to rebuild their credit score, and is demonstrating strong borrowing characteristics today.
Lastly, a paid collections account will remain on a credit bureau’s record for approximately 7 years before it falls off. While this might seem like a long time, most lenders will ignore accounts that are older than 3-4years anyways. This 7 year period is simply the time period after which a borrower is allowed to effectively start off from scratch after any kind of financial difficulty.