Budgeting Credit Debt

Does paying off collections improve your credit score

Those who have ever struggled with paying bills on time may have experience with collections accounts. If you fail to keep up with your monthly payments or default on a loan, the original creditor may send your bill to a debt collection agency. Any debt, whether from private, auto, or mortgage lenders, may be sent to collections if left unpaid. 

Debt collectors constantly buy overdue or delinquent accounts and often report their actions to credit bureaus. Credit bureaus then take that information to use for your credit reports. Unfortunately, unpaid collection accounts can have a pretty negative effect on your overall credit. But, once you’ve paid the debt collector and the delinquency is removed from your credit report, you may start to see a change. 

Does Paying off Collections Improve Credit Score?

Will paying off a collection account affect your credit reports positively? While the answer is generally yes, there are a few exceptions. For example, if you have accounts with multiple collection agencies, you may have to pay off more than one account before you see a boost in your score. 

But usually, paying off your account with a collection agency will positively affect credit reports. 

What Is a Credit Score and a Credit Report?

Credit scores are a three-digit number meant to represent your financial history and responsibility to lenders and other financial services companies. A credit bureau collects information regarding your financial habits and behaviors and uses that data to compile your credit report. Your credit report consists of a breakdown of those various habits and behaviors as well as your credit score. 

According to newer credit scoring models, the five main factors that contribute to credit scores are: 

  • Payment history 
  • Length of credit history
  • Credit mix
  • Number of new credit inquiries
  • Amount of debt 

Most lenders will reference an applicant’s credit report before approving them for funding. Typically, people who have a higher credit score find themselves eligible for loan perks like low rates and increased loan amounts. However, this doesn’t mean that people with low scores can get a good deal on a loan. 

Lenders consider other financial elements such as income and potential collateral when approving borrowers; otherwise, good credit history is often a pivotal deciding factor.  

Your payment history is perhaps one of the most significant factors that go into credit scores. When you pay off any kind of debt, like loans for bad credit online or even collection accounts, this action bodes well for your payment history. Paid accounts also mean the amount of debt you have accumulated is getting lower, which is also good for your overall credit. 

Can I Have a Paid Collections Account Removed From Credit Reports?

The only way to remove collection accounts from your credit report is to take care of the unpaid debt. Once you pay off the balance, the debt collector will contact credit reporting agencies to inform them of your debt repayment status. While paying off the debt will not completely remove the history of the collection account, agencies and financial institutions can still see that the debt is taken care of. 

Fortunately, paid collections generally affect credit scores and credit reports positively. So, there is a good chance you’ll see improvement in your credit report over time. 

Settling Versus Paying a Collection Account in Full 

There are two different ways to take care of your unpaid collections debt; settling or paying in full. While both of these methods will absolve you from making further payments, they will affect credit reports in different ways.

When you settle your debt, the balance will reach zero, but there will be a note on your credit report specifying that you did not pay off the debt yourself. So while your debt is taken care of, the action is still considered a negative item and may make lenders view you as a financial risk. 

When you pay off your collection account, lenders and financial institutions can see on your credit report that you were responsible for your debt and took care of it on your own. Therefore, it is always best to pay off debt with your own funds if you can. 

What Did My Credit Score Drop When I Paid off Collections?

On a rare occasion, individuals who pay off collections may see a dip in their credit score on their credit report initially. For example, say your credit card was your very first financial account, and you, unfortunately, racked up some credit card debt that got sent to collections. If you paid off that collections account and closed your credit card, you might see your credit score get a bit lower. This is because closing a credit card can affect credit if the credit card account is one of your oldest financial accounts. 

Similarly, individuals whose collection account is one of their first financial accounts may see a dip in their score once they pay their balance off. However, continue to stay consistent with your other bills and expenses and avoid collections accounts in the future. You should see your score stabilize. 

How Long Does It Take for Paid Collection Accounts To Come Off Your Credit Report? 

Depending on when you make your last payment will determine how long collection accounts stay on your credit report. Generally, negative items like a missed payment or delinquent account will remain on your credit report for up to seven years. But the longer you have your collection account, the longer it will stay as a negative item on your credit report. 

To avoid having a delinquent account on your credit for longer than necessary, the debt agency must be able to collect payment as soon as possible. If you are paying off multiple forms of debt, you should prioritize debt with the collections account while staying on top of the minimum amounts due for your other bills and expenses. 

Looking for other tips on how to improve credit scores and better your overall financial health? Check out the helpful CreditNinja blog for more free information!