Does Paying Off Collections Improve Your Credit Score?

If you’re like most Americans, you probably care about maintaining a good credit score. If you have had a collection account added to your credit report, you might be wondering whether paying off that collections account will improve your credit score? We will answer this question in much detail below.

Does Paying Off Collections Improve Your Credit Score?

No, paying off collections will not improve your credit score. Although logically, it would seem like paying off a collections account should improve your credit score, it will not. So, whether you have a paid collections account or an unpaid collections account on your credit report, your credit score will suffer just as much either way. A collections account will remain on your credit report for 7 years from the date you first became delinquent on making payments on your debt. After the 7 year period, the collections account will automatically be removed from your credit report.

That said, paying off your collections account will look better than an unpaid collections account to your future lenders and creditors. So, whether you decide to pay a collections account or leave it as unpaid is up to you.

Having said that, leaving a collection account as unpaid, allows the debt to be sold to another collection agency that can then place a different collection account on your credit report, causing additional damage to your credit.

If you have a collection account on your credit report, you should contact your creditor and negotiate the debt with them. If negotiations fail, you should contact the collection agency and try to negotiate a payment plan or payment of a lesser amount.

Collection agencies usually purchase debt for cents on the dollar. Many persons have reported being able to negotiate a lesser payment than what they originally owed. It’s not unheard of to have your debt reduced by 25%. For example, if you have a collection account for $1,000, you may be able to have it reduced to $750.

How Do Collections Affect Your Credit Score?

When a collections account is first added to your credit report, it will cause significant damage to your credit score. A single collections account can lower your credit score by up to 100 points. The higher your credit score, the bigger the drop you will experience as a result of a collections account being added to your credit report.

If you pay a collections account that’s on your credit report, the account will still remain on your credit report for the 7 year period. After the 7 year period is over, the collections account will automatically be removed from your credit report.

That said, the biggest impact that a collections will have on your credit score occurs when the account is first reported to the credit reporting bureaus. As the collections account ages, its impact on your credit score will begin to less until it’s ultimately removed from your credit report.

If you decide to pay the collection account, the account will not be removed on your credit report.

If you want the collection account to be removed from your credit report, you can try to negotiate with the collection agency, offer them payment of the outstanding debt in exchange for them to remove the collections from your credit report. Some collection agencies will agree to remove the collection account if you pay the debt, while others will refuse to remove it.

In the event that a collections agency agrees to remove the collections account in exchange for payment, you should have the agreement to remove the collections in writing so that you can enforce it in the event that they don’t remove the account.

That said, if the collections agency refuses to remove the collections, you can try to dispute it with the credit reporting bureau reporting the account. However, to successfully remove the collections, there must be some incorrect information being reported. If the collections account is legitimate and contains no errors, it will be very difficult to have it removed from your credit report.

How Long Does a Collections Stay On Your Credit Report?

A collections account stays on your credit report for 7 years from the date you became delinquent on making payments on your account or bills. For example, if your credit card payment was due on January 1st, 2022, and you missed that payment, the bank may have closed your account and sold the unpaid balance to a collection agency. The collection account could then remain on your credit report until January 1st, 2029.

After the 7 year period is over, the collection account should automatically be removed from your credit report. In the event that the collection account is not removed after the 7 year period is over, you can file a dispute with the credit reporting bureaus to have the collection account removed from your credit report.

After you file a dispute, the credit reporting bureau will conduct an investigation, if they find that the collection account has been on your credit report for more than 7 years, they will remove it for you.

Benefits of Paying Off a Collections Account

Although paying off a collections account will not improve your credit score, paying it off does have some benefits.

Here are some of those benefits:

  1. Stop collections activity – One of the biggest benefits of paying off a collections account is that it will stop the collections agency from continuously calling you and harassing you for payment of your debt. If you have ever had to deal with a collections agency, you know how relentless they are in attempting to collect money from you.

  2. Avoid a lawsuit – If you owe a collections agency a significant amount of money, they may sue you in civil court to recover the money that you owe them. If the collection agency is successful in its lawsuit against you, they may be able to garnish your wages until they’ve recouped the sum of money that you owe them. So, to avoid having to deal with a lawsuit and wage garnishment, you should contact the collection agency and negotiate the payment of your debt.

  3. Better Approval Odds – Paying off a collection account will increase the odds that you’ll be approved for the credit cards and loans that you apply for. This is so because many card issuers and lenders will not approve you unless you’ve paid off any collections accounts that you have. That said, you should keep in mind that although a collections account will not be removed simply because you’ve paid it, a paid collection account looks better to lenders and creditors who are reviewing your credit report to extend credit to you.

  4. No more debt – Although you may feel like paying a collections account is pointless since paying it will not improve your credit score, you may find some comfort in paying off a debt that’s owed to another party, coming one step closer to becoming debt-free.

How to Remove a Collections Account From Your Credit Report?

Here are some methods that you can use to remove a collections account from your credit report:

  1. Negotiate Removal – If you have not yet paid your collections account, you can use the payment of the collection account as leverage. You can ask the collection agency to remove the collection account in exchange for your payment of the debt. Some collection agencies are willing to negotiate because they have either purchased your debt or they take a percentage of the amount that they recover, so it’s in their interest to negotiate with you. That said, if you choose to go this route, you should get the agreement in writing by either writing a letter or having the collection agency agree via email. This will help you enforce the agreement in the event that the collection agency takes the money and refuses to remove the collection account from your credit report.

  2. Goodwill Deletion – The second option that you have to remove a collection account from your credit report is to contact the original creditor and ask them to remove the collection account from your credit report in goodwill. Some creditors will be willing to help you out, especially if you had a good relationship with them in the past. When you contact your creditor asking them to remove the collection account from your credit report, tell them that you’ve been a customer with them for a very long period of time and that the non-payment was an isolated incident that will not be repeated again. Some creditors will approve your request and remove the collections from your credit report in a show of goodwill.

  3. File a Dispute – In the event that the collection agency refuses to remove the collection account and a goodwill removal does not work, you can dispute the collection account with the credit reporting bureau reporting the collection account. All of the credit reporting bureaus offer consumers the ability to dispute collections through their online portals. Disputing a collection does not guarantee its removal unless there is incorrect information being reported. That said, you can always file a dispute and hope for the best as you have nothing to lose by filing a dispute. Disputing items is free and will not cost you anything.

Credit Score Planet Frequently Asked Questions (FAQs)

1. Will my credit score improve after paying off a collections account?

No, paying off a collections account will not improve your credit score because a paid and unpaid collections account have the same impact on your credit score.

2. Is it better to pay off a collections account or leave it unpaid?

There are some benefits to paying off a collections account. That said, before paying off a collections account, you should negotiate with the collection agency. Ask them to remove the collections in exchange for you paying off the outstanding debt. If they agree, great, if not, it’s up to you whether you think paying it off is in your best interest.

3. How long does it take to improve credit score after paying off collections?

Paying off collections will not improve your credit score. That said, as a collection account ages and becomes older, it will have less and less of an impact on your credit score. Once a collection account is removed from your credit report, you will see a significant improvement in your credit score.