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Does Paying Off Collections Improve Your Credit Score?
If you have ever received a phone call or a letter from a debt collector, you simply know it can be stressful. Debt collectors simply attempt to collect money owed to a landlord, medical service provider, or even some other creditor. And then, while paying or settling your collection accounts might certainly look better to future lenders, there is simply no guarantee your credit scores will improve as a result.
What Are Collection Accounts?
A collection account is simply an entry on your credit report that indicates a default on a previous obligation. The original creditor either sold the defaulted debt to a debt buyer or consigned the debt to a collection agency. The goal of the collector, not surprisingly, is simply to work on behalf of its client to be able to collect the defaulted debt from the debtor or as much of it as possible.
Collection accounts are often reported to credit reporting agencies and are also allowed to remain on credit reports for up to 7 years from the original debt’s first delinquency date, per the Fair Credit Reporting Act (FCRA).
How Do Collections Affect Credit?
Collection accounts are simply considered by both FICO®’s and VantageScore’s credit scoring systems and can also be highly influential to your credit scores. Collections can fall under payment history, which is the biggest factor in your FICO® Score calculation, driving 35% of your score. Consumers with collections on their credit reports are then likely to have lower credit scores than consumers who have no collections.
In addition to the potential impact on your credit scores, the presence of collections can also influence lender decisions. For example, Fannie Mae, which simply provides financing to mortgage lenders, has several policies requiring that collections be paid off prior to you closing on a mortgage loan.
It’s always a good idea for you to then pay collection debts you legitimately owe. Paying or settling collections will also end the harassing phone calls and even collection letters, and it will also prevent the debt collector from suing you. The debt collector will also update your credit reports to show the collection account now has a zero balance.
While it’s natural to assume that paying or settling a collection account will simply lead to a higher credit score, this is not always the case. As with most questions regarding credit scores, the answer to whether paying a collection will then simply be helpful is: “It depends.”
Will My Credit Improve if I Pay My Collection Account?
Newer credit scoring models simply ignore collections that have a zero balance. This is very true for both the most recent version of FICO®‘s credit score, FICO® 9, and also the two newest versions of the VantageScore® credit score, 3.0 and 4.0.
When you simply pay or settle a collection and it is then updated to reflect the zero balance on your credit reports, your FICO® 9 and VantageScore 3.0 and 4.0 scores might then improve. However, because older scoring models do not simply ignore paid collections, scores that are then generated by these older models will not improve.
This is very important because some lenders, especially mortgage lenders, use older versions of the credit scoring models. This then means, that despite it being a good idea for you to pay or settle your collections, a higher credit score might not be the result. If you then do choose to pay or settle your collections, it is a good idea to see how it impacts your credit scores. You can also check your FICO ® Score from Experian for free.
Keep in mind that the FICO® Score is currently available from Experian and is the FICO® 8 version, which also does not ignore paid collections. This then becomes a very good measuring stick because if you have got a solid FICO® 8 score even after paying your collections, it’s likely that your FICO® 9 and also VantageScore 3.0 and 4.0 credit scores will simply be equally strong, or even better.
Can You Remove Paid Collections From Your Credit Report?
While the FCRA then allows collections to simply be reported for up to seven years, there is also no requirement that a debt collector or even a credit reporting agency remove a collection simply because it has been paid.
If, however, you believe that you have a collection account on your credit report that is incorrect, then you have the right to dispute that information with the credit bureau and also have it corrected or removed if it is proved to be inaccurate. This right then simply applies to collections and also to other items on your credit report that you believe is incorrect.
If you have a verified collection account on your credit report, it will then not be removed until it naturally falls off after seven years. You can also even add a 100- to 200-word consumer statement to your credit reports simply explaining the collection, though this is not always recommended.
How to Improve Your Credit Scores after a Collection
The good news about the collection accounts on your credit reports? As they age, they count less toward your credit score. And also, even if you simply have a collection or collections on your credit report, there are also many other ways to improve your credit scores.
The best way for you to then start improving your credit score is to simply prevent new derogatory information from appearing on your credit reports. You can also achieve this by making all of your debt payments on time, without exception. If your bills are paid on time, your debts will never go into default, and there will even never be a need for a debt collector to get involved.
Ensuring that your credit card debt is as low as possible is another great way for you to improve your credit scores. Credit scoring models can also consider your credit utilization ratio, or amount of credit card balances relative to total credit limits when simply calculating your scores. Maintaining low balances ensures a low utilization ratio, which can then simply improve credit scores.
Finally, do not apply for credit unless you want or need it. Each time you do so, the lender will then likely pull one, if not more, of your credit reports. This will also result in a hard inquiry on your reports, which can even lower your scores temporarily. And also while inquiries are the least influential factor in your credit score, they can still be a red flag to lenders.
FAQs
Can Paying Off Collections Raise Your Credit Score?
Unfortunately, your credit score will not even increase if you pay off a collection account because the item will not be taken off your credit report. It will just simply show up as “paid” instead of “unpaid,” which might positively influence a lender’s opinion.
Is It Better To Pay Off Collections Or Make Payments?
Paying your debts in full is also always the best way for you to go if you have the money. The debts won’t just go away, and collectors can be very persistent in trying to collect those debts. Before you can make any payments, you then need to verify that your debts and the debt collectors are legitimate.
Should I Pay Off A 2-Year-Old Collection?
If you have a collection account that’s less than seven years old, you should still pay it off if it’s within the statute of limitations. First, a creditor can then bring legal action against you, including garnishing your salary or your bank account, at least until the statute of limitations expires.
Is It Worth It To Pay Off Collections?
It’s always a good idea for you to pay collection debts you simply legitimately owe. Paying or settling collections will then end the harassing phone calls and even collection letters, and it will prevent the debt collector from suing you.