Does Paying Collections Help Your Credit Score?

A collection account arises when an original creditor, such as a credit card company or a hospital, determines that a debt is unlikely to be paid and sells or assigns it to a third-party collection agency. This typically occurs after a period of missed payments, usually several months. Many individuals facing this situation wonder about the impact on their credit standing and whether resolving the debt improves their credit score. This article explores how collection accounts influence credit scores and the various considerations when addressing them.

How Collection Accounts Affect Credit Scores

A collection account represents a significant negative entry on an individual’s credit report, signaling a failure to meet financial obligations as originally agreed. When an original debt goes unpaid for an extended period, the creditor often charges off the account and then sells the debt to a collection agency. This transfer of the debt to a third party is then reported to the major credit bureaus, creating a new, distinct entry on the credit report.

The presence of a collection account indicates a higher credit risk to potential lenders because it reflects a history of non-payment. This negative mark can substantially lower an individual’s credit score, impacting their ability to obtain new credit, secure favorable interest rates, or even rent an apartment. Collection accounts, whether paid or unpaid, generally remain on an individual’s credit report for up to seven years from the original delinquency date of the original account.

The Direct Impact of Paying a Collection Account

While resolving an outstanding debt is a sound financial practice, the immediate impact of paying a collection account on credit scores can be less straightforward than anticipated. Once a collection account appears on a credit report, it will typically remain as a negative mark for up to seven years from the original delinquency date of the debt, irrespective of whether it is paid or not. The act of payment itself does not erase this derogatory mark from the credit history.

Different credit scoring models treat paid collection accounts with varying degrees of impact. FICO Score 8, which remains the most widely used scoring model by lenders, generally does not differentiate significantly between paid and unpaid collection accounts once they have been reported. This means that even after payment, a collection account may still exert a substantial negative influence on the FICO 8 score. The model primarily registers the existence of the collection and the underlying delinquency.

Conversely, newer credit scoring models, such as FICO Score 9 and VantageScore, tend to give less weight to paid collection accounts. FICO Score 9, for example, may even ignore paid collection accounts for scoring purposes, leading to a potential improvement in scores once the account is reported as paid. VantageScore models also generally treat paid collections more favorably than unpaid ones. However, these newer models are not yet as widely adopted by lenders as FICO Score 8, meaning their positive impact might not be universally recognized.

Paying a collection account, while it may not immediately boost a FICO 8 score, can still be beneficial. A “paid” status on a collection account can be viewed more favorably by lenders, even if the score itself does not see an immediate jump. This demonstrates an individual’s commitment to resolving outstanding obligations, which can be an important factor in lending decisions beyond the numerical score.

Navigating Your Options for Collection Accounts

When faced with a collection account, the initial step should always involve validating the debt to ensure its legitimacy and accuracy. Individuals have the right under federal law to request verification of the debt from the collection agency within 30 days of receiving the initial communication. This process helps confirm that the debt belongs to the individual, the amount is correct, and the collection agency has the legal right to collect it.

There are several approaches to addressing a collection account, each with specific implications for a credit report.

Paying in Full

Paying the debt in full will change the account status from “unpaid” to “paid in full” on the credit report. While this resolves the financial obligation, the negative mark from the collection account will still remain on the credit report for up to seven years from the original delinquency date. This status change can be beneficial for future lenders who review the report manually.

Settling for Less

An individual might negotiate to settle the debt for less than the full amount owed. If an agreement is reached, the account status will typically be reported as “settled for less than the full amount.” This status also marks the debt as resolved but remains a negative entry on the credit report for the same seven-year period. While it saves money, it can be viewed less favorably by some lenders compared to paying in full.

Pay-for-Delete

A less common but often sought-after strategy is negotiating for “pay-for-delete.” This involves requesting the collection agency to remove the negative entry from the credit report entirely in exchange for payment. Collection agencies are generally not obligated to agree to this, and it is rare for them to do so, as it goes against standard credit reporting practices. If an agency does agree, it is imperative to obtain the agreement in writing before making any payment to ensure the terms are honored.

Disputing Inaccuracies

If a collection account is found to be inaccurate, individuals can dispute the debt directly with the credit bureaus and the collection agency. Providing evidence of the inaccuracy can lead to the removal of the collection account from the credit report. Even with these actions, the underlying principle holds true: any collection account, whether paid, settled, or disputed and not removed, will generally remain on the credit report for up to seven years from the original delinquency date of the original account.

Strategies for Credit Improvement Beyond Payment

A collection account is only one component influencing an individual’s overall credit score, and focusing on broader credit health can significantly mitigate its long-term impact. Establishing and maintaining positive credit behaviors is paramount to improving one’s credit profile over time. Consistent on-time payments for all other financial obligations, including loans, credit cards, and utility bills, are fundamental. Payment history accounts for a substantial portion of credit scoring models, making timely payments a powerful factor.

Another significant area to manage is credit utilization, which refers to the percentage of available revolving credit that is currently being used. Keeping credit utilization low, typically below 30% of available credit, demonstrates responsible credit management and can positively influence scores. This involves avoiding the accumulation of new, unnecessary debt and using existing credit judiciously.

For individuals with limited credit history or those seeking to rebuild, establishing new, positive credit can be beneficial. This might include responsibly managing a secured credit card, where a deposit sets the credit limit, or obtaining a credit-builder loan designed to help establish a payment history. Regularly monitoring credit reports from all three major credit bureaus for accuracy is also a proactive step. This allows for the timely identification and dispute of any errors, which could otherwise negatively affect credit scores.