Does Paying a Debt Collection Hurt Your Credit?

A debt collection arises when an original creditor charges off an unpaid account and sells or transfers it to a third-party collection agency. Understanding the mechanics of debt collections and their interaction with credit reports is important for managing one’s financial health effectively.

How Debt Collections Appear on Credit Reports

When an account becomes severely delinquent, the original creditor may charge it off and sell the debt to a collection agency. This collection account then appears on credit reports maintained by major bureaus such as Experian, Equifax, and TransUnion. The appearance of a collection account signals a significant failure to meet a financial obligation.

The initial reporting of a collection account causes a substantial and immediate drop in credit scores. This negative mark indicates to potential lenders that a consumer has previously defaulted on a debt. The collection account can remain on a credit report for approximately seven years from the date of the original delinquency, even if the debt is subsequently paid.

The Impact of Paying a Collection on Credit Scores

Paying a collection account changes its status on your credit report from “unpaid” to “paid.” The initial damage to the credit score occurred when the account first went into collections due to the original delinquency. Therefore, paying a collection does not result in an immediate, significant increase in credit scores.

The presence of a collection account, even if paid, remains a negative item on a credit report for its full reporting period. However, some newer credit scoring models, such as FICO 9 and VantageScore 3.0, may weigh paid collection accounts less negatively than unpaid ones. Lenders view a “paid” collection more positively than an “unpaid” one, which can be beneficial when they manually review credit applications. Over time, as other positive credit behaviors are established, a paid collection can contribute to a gradual improvement in credit standing.

Other Key Factors Influencing Credit Scores

Payment history is a significant component of a credit score, reflecting whether payments on various accounts are made on time. Credit utilization, or the amount of credit used relative to the total available credit, also plays a substantial role.

Maintaining low credit utilization, ideally below 30% of available credit, contributes positively to a credit score. The length of one’s credit history, including the age of accounts and the average age of all accounts, influences the score. Additionally, the types of credit used, such as a mix of installment loans and revolving credit, and new credit applications, which can temporarily lower a score, all contribute to the overall credit profile.

Addressing Inaccurate or Disputed Collections

Consumers should regularly obtain copies of their credit reports from all three major bureaus, which can be done annually through AnnualCreditReport.com. This practice helps identify any collection accounts that may be inaccurate or fraudulent. If an inaccuracy is discovered, the Fair Credit Reporting Act (FCRA) provides rights to dispute information.

The dispute process involves contacting the credit bureau and often the collection agency directly, providing documentation to support the claim. The credit bureau then has a period, 30 days, to investigate the dispute with the data furnisher. If the information is found to be inaccurate or unverifiable, it must be removed from the credit report.