If you have a collection account, most people’s first thought is to pay it off.
But will paying off a collection help your credit score?
Not unless the collection agency removes the account from your report altogether.
If paying a collection account doesn’t help your score, what can you do?
This article discusses strategies you can use to remove collection accounts to increase your credit score.
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How Bad Do Collection Accounts Hurt Your Credit Score?
Collection accounts can destroy your credit score. A single collection account could drop a credit score by as much as 100 points. Your payment history makes up 35% of your overall credit score, according to FICO.
If you have collections on your credit report, then you’re probably wondering if you pay off the collections, will it improve your credit score? There are many different opinions on this matter, but the short answer is no.
A collection account is part of your payment history. The amount of debt owed is no longer a factor in your credit score because it’s been charged off. That’s right, a collection account with a $10,000 balance hurts your credit the same as a collection account with a zero balance.
Don’t believe debt collection agencies
Having worked for debt collection agencies and credit repair companies, I know what these debt collectors are taught to say. Don’t fall for their lies. Know the truth about paying off debt and how it affects you and your credit.
You can use some techniques that have been proven to work for many consumers that can remove collection accounts from your report entirely.
It’s common for debt collection companies to say just about anything to get you to pay something. There are many things debt collection agencies teach their employees to say, and it works. Unfortunately, not enough people understand the fact that paying off collections does not improve your credit score.
Most collection agency employees are young, money-hungry, motivated, and persistent. Debt collection agencies pay their collectors commissions on every dollar they collect. They run daily contests to see who can collect the most money and reward employees with money and prizes.
Know how to deal with collection calls. Stand your ground, don’t give in to their demands or slippery wording to get you to pay them. Whether you should pay the collection off or not will depend on a couple of factors.
Lies that debt collectors will tell you
- “Paying off collections will improve your score.”
- “We will report the account status as “Paid in full,” and that helps your score.”
- “Our legal department will file a lawsuit.” Threatening a consumer with a lawsuit is against the law. And the majority of collection companies will not go through the trouble to file one.
- “You can contact the credit bureau to have a paid collection removed from your credit report.”
How does the debt collection agency get my debt?
There are two ways collection agencies work. Some are hired by creditors to collect the debt and receive a percentage of the collected amount. However, most collection agencies buy large portfolios of debt from the original creditors for pennies on the dollar. The collection agency now owns the debt and can collect on it.
Paying collections that have not yet been reported to the credit bureaus
If the account is not yet on your credit report, it’s wise to pay the debt to avoid taking the hit on your credit. It will be much more difficult to remove the collection account after being reported to the credit bureaus. If you cannot afford to pay the collection off, they will work out a payment plan for you. As long as you are paying them something, they won’t report anything to the credit bureaus.
Send a debt validation letter
You can send a debt validation letter to the collection agency asking them to send you all information they have for the account. They have 30 days to respond to your request. If they don’t, the account must be removed from your report. You can use this sample debt validation letter as a template. A validation letter is basically asking for documents showing the collection company legally owns the debt.
Negotiate a settlement
If a collection agency is demanding payment on an account that has not yet been reported to the credit bureaus, you can settle the debt. Offer to settle the debt for 30% of the amount due and start the negotiating.
Because the collection agency paid less than 15% for your debt, 30% means they double their money. That’s much better than getting nothing. In a way, this gives you the upper hand in negotiating. However, the collection company can report the account to the credit bureau if you don’t pay it. It is best to agree to pay the debt before it affects your credit rating.
You can negotiate a settlement with the collection agency as well. If the account is still with the original creditor, they will require the full payment to satisfy the account in most cases.
Paying collections that have already been reported to the credit bureaus
When dealing with a collection account that has been reported to the credit bureaus, there are a few things you can try to get it removed from your credit report.
Dispute collections with the credit bureau
The first thing that is recommended is to dispute any collections with the credit bureau first. When this happens, the credit bureau will submit a request to the collection company, asking them to verify the debt. The collection agency has 30 days to respond to the request or, by law, the credit bureau must remove the account from your report entirely.
Disputing negative items on your credit report is what a credit repair company does to help increase their clients’ scores. In some cases, the collection agency fails to respond to the request, and the account is removed. If this works, great. Rarely is a removed account added back onto a credit report at a later date. Use our credit bureau sample dispute letters.
Pay for delete
A “pay for delete” is when you agree to pay off debt as long as the collection agency agrees to remove the collection account from your credit report. Make sure you get a “pay for delete letter” from them stating they agree to remove the account from your credit report before you pay them. Some debt collectors will tell you they will delete it from your credit report to trick you into paying off the debt.
Many companies will offer a pay for delete. However, some will not remove the account from your report regardless if you pay it or not. Regardless of what they tell you, paying off debt on a collection account will not improve your credit score.
Changing the status to Paid doesn’t do anything to your credit score
Changing the status to “Paid,” “Paid as agreed,” or “Settled” will not have any impact on your credit score. The balance will not impact your credit score, either if a collection company refuses to pay for delete and responds to the credit bureau when you file a dispute.
You will have to wait it out; the more time passes, the less impact collections have on your score. A collection account will drop off your credit report 7 years from the date the account went 180 days past due.
Why doesn’t paying off collection accounts improve your credit score?
Your credit score measures the likelihood a consumer will fall behind on their payments by 90 days or more. When you have collections on your report, whether paid or not, shows you defaulted on a financial obligation.
The account itself is counted against your credit score; the amount of debt is irrelevant. This is because the account was charged off and, in many cases, sold to a third party debt collection agency. Furthermore, if you pay off the debt to the collection agency, the original creditor is still the party that sustained the loss.
This does not make it any less likely you will default on a future loan, and FICO will not increase your credit score if you pay off debt on a collection account.
Frequently Asked Questions
How long after paying off debt will my credit score improve?
If the debt is reported as a collection account on your report, it won’t improve your credit. You should contact the collector about doing a “pay for delete.”
How long do collections stay on your credit report?
7 years from the date the account went 180 days past due with the original creditor.
Do medical bill collections affect your credit score?
Yes. Medical bills will be treated the same as any other type of collection account. Medical bill debt in collections will have a significant negative impact on your score.
How to remove the collection account from your credit report?
Sometimes you can get a collection account removed from a credit report by disputing the account with the credit bureau. You can also contact the debt collection company about a “Pay for delete.”
Will paying off collections improve my credit score?
No. Paying a collection account will have no impact on your credit score, positively or negatively. You must get the account deleted from your report to improve your credit score.
How to dispute a collection account?
How can I get rid of debt?
Please read our article giving tips to getting out of credit card debt.