Collections on your credit report: Does paying off collections improve credit score?

When you pay off collections accounts, it will show up on your credit report as paid, but it will not disappear. You should expect it to remain on your report for seven years. This means that it could affect your credit score- the sharpest drop to your score will occur when the account is first reported to the credit collection agencies as in collections, and then the damage lessens over time.

Collections accounts are those accounts you have stopped or defaulted, making payments on, which have been reversed from the original creditor to a collections agency. And in case you have one of these on your credit record, you might have a hard time getting accepted for any new credit or loans. In fact, it is considered as one of the worst items you can have on your credit report.

In case you have even one collection account on your report, it is possibly impacting your credit score. This is exceptionally true for more recent collections. To improve your credit score, try to get these collection accounts deleted from your report or have them at least reported as Current or Paid. The best thing to do before paying off a collection is to first bargain with the debt collector to update your credit report to something commendatory. The only unacceptable case is to pay the collection without having the fact reflect on your credit report.


How do credit scoring models view paid off collections accounts?

Will my credit score go up if I pay off collections?

All credit scoring models penalize you for having unpaid collections, even though some have a $100 threshold. Some models do not keep on punishing you once you have paid the collections.

FICO Score 9, The newest FICO score model, views collections differently than previous FICO models. It ignores paid collections in the score calculation ( and unpaid medical collections will have less of a score effect than previous models). Vantage Score 3.0 also disregards collections with a zero balance. Collections for accounts that were initially under $100 are disregarded for scoring purposes in FICO 9, FICO 8, and VantageScore 3.0. Nonetheless, older models, like the ones typically used for mortgages, do consider them.

The good news is that taking care of a collection account will improve your credit score with these two new credit scoring models. The bad news is that most creditors and lenders are not utilizing these new credit score models, with older FICO models presently in place, even though VantageScore use keeps on growing.

Remember, with paid collections, the further in the past it becomes, the more your score will rise going forward, little or little if all positive credit factors such as on-time payments and low debt usage are followed. It is worth noting that the newest credit scoring models might be ignoring paid collections, but these accounts still appear in your credit record with the three major credit reporting agencies.


How collections agency view paid off collections accounts?

The primary purpose of the practice of a collections agency reporting the unpaid debt to the credit bureau is to persuade you to pay your debt or suffer the harmful blemish to your credit report. However, once a debt is already reported to the credit bureaus, there is not much incentive to pay.

For collections agencies, they have accomplished their goal if they have made you pay the debt in full or even reach an agreement that the debt is satisfied for less than the whole balance. Along with the newest credit scoring models, some collections agencies do not see the need to keep reporting a debt that was paid. To stop reporting on the debt or have it removed from your credit report entirely may be an inducement for you to pay. As maintained by the Fair Credit Reporting Act, these creditors are mandated to report accounts accurately, which reports nothing about not reporting the accounts at all.

Most collections accounts will stay on your credit report for the full seven years after paying with a status labeled, paid. The only time collections agency or a creditor is obligated to stop reporting your collections account and have it removed from your credit reports is if there was an error in the reporting of the debt.

However, some collections agencies are recently more amenable to advising the credit bureau to remove your collections account entirely after they get full payment on a debt or you make an agreement with them to ascertain the debt for less than the total balance owed.


How lenders and credit bureaus view paid collections accounts?

The credit bureau is a service created for lenders and creditors to assess consumer debt risk, or the possibility that any credit applicant will repay a debt. For them, the essential thing is to maintain a complete file of credit accounts and credit behavior for each consumer.

Collections accounts, if paid or unpaid, constitute a risk of repayment to a creditor. So, the creditors and the credit bureaus want to see collections accounts stay on the credit report, even when paid. Consequently, the credit bureaus and the lawmakers disapprove of the practice of removing paid collections accounts from the credit report since it violates the contract creditors have with the credit bureaus report accurate information even though the consumer is under no such obligation.

According to Experian, the practice of actually removing the entire account and collections accounts are rare.


Should you pay off collections?

Benefits of paying your debt collections

If paying is not going to heal your credit report, what is the point of paying the collection? Paying the debt can benefit you in the following ways:

You will avoid legal action

People sometimes suppose debt collectors will not waste their time or money suing them over small collections. However, that is not always true. All in all, if you have an outstanding collection that is still within the statute of limitations, there is still a threat of being sued for what you owe.

A lawsuit could lead to a court judgment- a public record that will harm your credit report for seven years. And in case you still do not pay, the collector might get court permission to garnish your wages.

Stop the collection calls for good

All in all, if you have outstanding debt, you will possibly keep on getting calls from collections agencies. A desist letter and cease may end calls from one particular debt collector. However, collections accounts are often switched between agencies. Thus, you will keep on being contacted about the debt until it is taken care of.

Get approved for loans and credit cards

You will look better to lenders once you pay off collections accounts. Many banks will not approve a credit card or loan application as long as you have outstanding collections accounts on your credit report. In other words, you cannot get a credit card, loan, or mortgage. Besides, some employers will not hire you for various jobs if you have unpaid debts on your credit report. And many landlords will not accept your application for a lease.

Even though paying the collection will not remove it from your credit report, the cost of bringing the balance to $0 might be well worth it if that debt is what was hindering you from getting a loan for a car.

You will avoid additional fees and interest

It is sophisticated, but in most cases, collectors are allowed to keep charging you interest and fees after they have bought your debt. Paying the loan quickly can reduce this to a minimum. Paying collections will improve your credit score. 

As collections get older, they impact your credit less. Collection accounts will be deleted from your credit report after seven years, even if you never pay them. However, if the accounts are less than seven years old, a paid collection is better for your credit score than an unpaid one.

Note that settling an account by negotiating a lower payoff is not the same as paying the full, original debt. Creditors might still view a negotiated payoff as an example of a potential borrower who did not fully settle a debt- even though your balance shows $0 owed.

Paying collections makes you get closer to being debt-free

Paying off a debt held by a collection agency means you still owe money to one less organization. You might feel like you have lost the battle if you settle a debt after resisting for months or years. However, in the long run, it is better for your credit and your finances. Managing your debt collections is a good thing when you can afford to do it.


Tactics for paying off debt collection

What are some of the debt collection payment scenarios?

Below are some of the possible outcomes and scenarios of debt collection payment, outlined from the most ideal to the least ideal but still acceptable.

Get the collection debt removed with settlement-Ideal

You can negotiate with the debt collector to have the account deleted from your credit report in exchange for payment. To do this, start by sending a delete letter to the collector offering settlement payment if the collector removes the account from your credit reports. To delete letters to be useful, it is best to be specific, concise, and to the point.

Settlement payment is an amount that is a given percentage of less than the total amount due. The more you are willing to pay, the more chances it is that the debt collector will work with you. Make sure you wait for a written response from the collector before taking any action.

You can also contact the collector via phone to negotiate to pay for delete. Nonetheless, you risk inadvertently saying something to the collector that shows liability or responsibility for the debt. And you do not want to do this if you are beyond or nearing the expiration of the statute of limitations.

Even if you decide to negotiate by phone, you still need to have an agreement in writing. Let the collector mail or fax you a letter, including the terms of the agreement before making a payment. Always remember, debt collectors do not have to delete accurate entries from your credit report.

Get the collection debt removed with full payment

This is the next better option for getting the collection removed. Most debt collectors want payment in full and will not remove the account from your credit report for a settlement payment. When this is the situation, offer to pay the account in full in exchange for the collector removing the account from your credit report. Again, send your appeal in writing and wait until the collector responds in writing before making a payment.

Collection settled, but reported as paid in full

Preferably, you want the entry completely deleted from your credit report. Unluckily, not all collectors are willing to do this even in exchange for payment. In case you cannot have the entry completely deleted, you should have it updated as paid in full. Offer the collector a settlement payment some zero percent less than the entire amount owed. Get the collector to accept to update the accounts as paid in full. The agreement should be in writing.

Collection settled, but reported as settled

You can settle the account with the collector and accept an update of paid settled. Bear in mind that a settled entry on your credit report will not boost your score so much as Paid in full. In case you want your account to be state-paid in full but cannot get the collector to do so for partial payment, then pay the account in full.

Pay in full- still acceptable

There is nothing wrong with paying the entire amount of debt collection that you owe. Of course, you would never pay a collection that is not yours, so if you do not remember the debt, follow steps for the debt validation procedure to have the collector send your proof that the debt belongs to you.

Then, after you are satisfied, it is yours, you can send a payment for the entire amount of the debt. For any scenario, make sure you monitor your credit report to ensure the collector updates the account as paid. Once you have paid the collection, file away your proof of payment. In case the collector does not update the account, you can dispute the account with the credit bureau, offering proof of payment if necessary.


How to prioritize collections accounts?

If you have a combination of old and new collection accounts, paying off the ones that occurred currently is going to be more useful to your score. After a collection account has passed the seven-year mark, you will need to tread with caution when paying it off.

At this juncture, it should fall off your credit report entirely, but any new activity, inclusive of a partial payment, can reactivate the account. In case you are going to manage a debt that is aged off your report, be aware that you may create a new account history if you are not paying in full. In some states, making a partial payment also resets the clock on the statute of limitations.


Settling collection account versus paying in full

Considering how VantageScore and FICO’s newest models view paid collection accounts, the goal, if you have collection debts, is to get your balances down to zero. Paying the debt in full is one option, but settling those accounts is going to yield the same result concerning your credit score and potentially save you some money in the process.

However, it is essential to note that canceled debts typically have to be reported on your taxes as income, not unless you qualify for an exclusion or exception. In case you are settling a large amount of debt, that could come back to haunt you at tax time.

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