Does Paying Off Collections Improve Your Credit Score?

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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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. 

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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 in that state. 

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. 

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. H2 – When Paying Off Collections May Help You

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. 

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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. 

Consider a Credit Builder Loan to Looking to Improve Your Credit Score While Saving Money to Pay Off Debts

Do you want to take care of unpaid debts but don’t have the funds on hand? Consider a credit builder loan from Self, as it offers the best of both worlds – the ability to save money while rebuilding your credit health. 

There are four affordable credit builder plans to choose from: 

  • Small Builder: pay $25 per month for 24 months and receive $520 back when the repayment period ends 
  • Medium Builder: pay $35 per month for 24 months and receive $724 back when the repayment period ends
  • Large Builder: pay $48 per month for 12 months and receive $539 back when the repayment period ends
  • X-Large Builder: pay $150 per month for 12 months and receive $1,663 back when the repayment period ends

It’s also important to note that a one-time $9 administrative fee is assessed on all credit builder accounts. 

When you’re ready to start improving your credit score and saving money to pay off debts: 

  • Download the Self app on the AppStore or GooglePlay.
  • Set up an account and apply for a Credit Builder Account without impacting your credit score. 
  • If approved, select the plan that works best for you.

Self will deposit your monthly payments in a protected and secured bank account until the repayment period ends. At that point, they will be returned to you, minus fees and interest. 

Payment history is reported to the major credit bureaus – Experian, TransUnion, Equifax – monthly to help build your credit health. So, you can watch your credit rating and savings balance grow over time. 

Visit the website today to learn more about how Self works, or download the mobile app to apply for a credit-builder account.

Self

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