You hit a rough financial patch and fell behind on your bills. Then, after a few months of the accounts being in delinquent status, they were turned over to a collection agency and reported to the major credit bureaus. But now, your finances are starting to get back on track, and you’re thinking about paying off the collection account.
Is it a wise move, and will your credit score improve? Of course, it depends, but you should know that paying off collection accounts won’t necessarily improve your credit score right away. However, your score could begin to improve over time as the collection account ages.
Introduction to Debt Collection and Credit Scores
What’s a Credit Score and Why Does It Matter?
Your credit score is a numerical representation of your creditworthiness or how likely you are to responsibly manage and repay borrowed money. It is calculated based on the information in your credit report, which includes your payment history, debt utilization rate, length of credit history, credit mix and new credit. A higher credit score usually translates to lower interest rates, which helps lower borrowing costs significantly and saves you money over time.
What Are Collections?
Collections are accounts reflected on your credit report that are tied to unpaid debt obligations. These accounts are either consigned by the original creditor for collection or sold for a portion of what’s owed to a collection agency. It’s also common for collection accounts to bounce around from agency to agency until they’re no longer collectible or payment is received by the debtor.
They remain on your credit report for up to seven years from the date of first delinquency, as mandated by the Fair Credit Reporting Act (FCRA). But the window of time that it is collectible depends on the type of debt you have, where you live and the respective laws and statute of limitations in that state.
Understanding the Collection Process
When you fail to make payments on your loan, credit card or other debts, creditors may send your account to a collection agency after some time has passed. Collections accounts can significantly affect your credit score and linger on your credit report for up to seven years, even if you pay the balance in full.
The collection process begins when your original lender sells your delinquent debt to a collection agency. This third-party agency will then try to recover the money you owe by contacting you through phone calls, letters and other methods (permissible by law).
How Debt in Collections Affect Your Credit Score
Collection accounts can drastically affect your credit score. In some instances, consumers see a dip of up to 100 points. The impact depends on your credit score before the collection is added – the drop is usually higher for individuals with good or excellent credit scores.
What Happens When You Pay Off Collection Accounts?
The Effect of Paying Off Collections on Your Credit Report
Paying off collections may improve your credit score, depending on the scoring model used by the credit bureaus. Newer models, including FICO 9, FICO 10, VantageScore 3.0 and VantageScore 4.0, tend to ignore collection accounts with zero-dollar balances. However, many lenders still use older scoring models, so paying off a collection account doesn’t guarantee an immediate boost in your credit score.
The status of the account will also change from “unpaid” to “paid.” Still, it will stay on your credit report for up to seven years from the original date of delinquency. Although it might not be reflected in your credit score, a paid collection account can paint a more favorable picture of your financial responsibility to potential lenders. Furthermore, Lenders might be more likely to approve you for a loan or credit if you have settled your collection accounts, even if your credit score remains the same.
In some cases, you may be able to negotiate “pay-for-delete” agreements with debt collectors. This means they agree to remove the collection account from your credit report in exchange for payment. However, there are no guarantees you’ll have success with this method as debt collectors and creditors do not widely accept it.
Should You Pay Off Collections to Improve Your Credit Score?
It’s never a bad idea to pay off collections if they’re for debts you actually owe. There’s a remote chance your credit score with newer scoring models could improve as some overlook paid collection accounts. However, the older scoring models that are used by most lenders and creditors when making credit decisions do not ignore collection accounts, even if they’re paid.
Still, you should consider settling or paying what’s owed, as there are other benefits that can come from doing so. More on this shortly.
When Paying Off Collections May Help You
Avoid Legal Action
The collection agency could sue you in court to recoup what’s owed if you fail to pay what is owed. By contrast, paying off or settling the account helps you avoid legal action and court costs.
Avoid Additional Interest and Fees
Collection accounts that remain unpaid for an extended period often accrue additional interest and fees.
Look Better to Other Lenders
When you apply for credit, most lenders and creditors review your credit profile to determine if you’ve responsibly managed debt obligations in the past. While a collection account is viewed in a negative light, a status that reflects “settled” or “paid in full” demonstrates that you’ve taken the necessary steps to resolve the account.
Stop Collectors from Selling Your Accounts
As mentioned above, many collections bounce between debt collectors until they’re resolved. But you can stop this from happening by paying the account.
Improves Your Future Credit Score
Once you’ve paid the collection, you can put the negative account behind you and focus on taking action moving forward to help boost your credit health.
Practical Steps to Managing Collections for Your Credit’s Sake
Evaluating Your Financial Situation
Before you can address collections, it’s best to have a clear understanding of your financial situation. Take time to review your outstanding debts, including credit card balances, student loans and any other outstanding obligations. Doing so makes it easier to identify the accounts that have been sent to collections and prioritize them accordingly. While dealing with collections, make timely payments on your other debt accounts to avoid dinging your credit report even more.
Negotiating with Collection Agencies
When you’re ready to address your collection accounts, consider reaching out to the collection agencies and negotiating the terms to resolve the debt. You can often work out a reduced payment or payment plan that makes the debt more manageable for you. Make sure to get any agreements in writing, and be aware that settling for less than the full amount owed may still have a negative impact on your credit.
Paying Off Collections Smartly
Remember, simply paying off a collection account may not immediately improve your credit score, as it depends on the credit scoring model and what other items are on your credit report. Still, it’s essential to resolve collections to prevent further financial damage and legal action. When settling debts, prioritize the ones with the largest negative impact on your credit, such as those with the highest balance or the most recent collection accounts.
Seeking Professional Help
Consider seeking professional help, such as credit counselors or legal services. Organizations and companies can offer guidance and techniques to rebuild your credit while navigating collections. Also, check your credit reports from the three major bureaus – Experian, TransUnion and Equifax – to ensure accurate information and to monitor your progress as you work to resolve your collection accounts.
Improve Your Credit Score with a Credit Expert
If you have unpaid collections on your credit report, it may be difficult to improve your credit score without help. A specialized BBB-accredited company like The Credit Pros can provide the assistance and guidance you need to start improving your credit score. They offer affordably priced services with no long-term contract commitments, tailored to your specific situation to help you with credit report corrections, establishing credit, or increasing credit scores fast. Complete a short form or call (727) 306-8201 to have a credit specialist from The Credit Pros’ team contact you to help you get fast and effective results.
In some cases, the best way to improve your credit score is by paying off the collection account or accounts in question. This will show potential lenders that you are willing to take responsibility for your financial obligations, and it can help improve your credit score. However, before you make any payments, it is important to speak with a professional company or lawyer to ensure you are making the right decision.
In addition to paying off collections, there are other ways to improve your credit score and rebuild your credit history. You can work with a company to contact creditors or collection agencies and ask them to remove negative items from your report if they are outdated or incorrect. They may also be able to negotiate new payment plans with creditors for you in order to lower the amount owed and create an easier way of paying back debt.
Overall, paying off collections can be beneficial if done correctly. It is important that you speak with a professional or lawyer to ensure that you are making the best decision for your financial situation. The goal should be to improve your credit score and create a positive payment history. With the help of professionals who specialize in credit restoration, you can start rebuilding your credit history and begin improving your credit score today.
Frequently Asked Questions (FAQs)
Paying off collections may or may not lead to an immediate increase in your credit score. It depends on the specific credit scoring model.
There’s no fixed number of points that your credit score will increase when you pay off collections. The impact varies depending on several factors, like your overall credit history, the age of the collection account and the model used by the lender to calculate your score.
It depends on where your credit score stood prior to the collection account being reported. If you had stellar credit, your rating could drop by up to 100 points. However, the impact is not as significant if your credit score is already on the lower end.
