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Having collection accounts appear on your credit history is not good for your credit score. The repeated calls from debt collectors are not good for you mentally either.
Paying the debt off will end the collection agencies’ incessant calls, but will it improve your credit score at all?
Paying off collection accounts can be a good step towards credit repair, but how much of an impact to your credit score there will be depends on the scoring model used, age of the collection account, and the type of collection account (i.e. medical debt vs. credit card debt).
You could see a substantial credit score increase, a small increase, or no change to your credit score at all. In other words, directly paying off the collections account may not have the credit score improvement that you’re looking for.
If you’re fixing your own credit, the best way to go about this is to negotiate a “pay-for-delete” situation.
Read on to figure out how.
How Does Paying Off Collections Affect Your Credit Score?
The impact paying off debt collections has on your credit score depends on a variety of factors.
The first thing to consider is what credit scoring model you are looking at.
FICO Score 8 – the most commonly used credit score – and older credit scoring models give the same weight to paid collections as they do unpaid collections. So, in this case, paying off the collection will not improve your credit score at all unless you submit a ‘pay for delete’ letter.
If you are looking at a FICO Score 9 scoring model or higher, then paying the collection should improve your credit score.
Another thing to consider is the value of the collection. Is the collection for less than $100?
If it is, then most scoring models will entirely ignore the collection when calculating your credit score, so paying off this small-value collection account won’t impact your score.
Another important consideration is the type of collection. Newer scoring models weigh medical collections less harshly, so while paying them off will improve your score, paying off other types of collections will increase your score more substantially.
A final consideration is the age of the collection. The newer the collection, the bigger impact it has on your credit score.
So, if you were to pay off a collection that was 6 years old, then the potential improvement to your score won’t be as high as it would be if you were paying off a collection that was only 1 year old.
Regardless of the scoring model, collection account age, or collection value, paying off a collection is still prevents you from receiving a judgment against the debt and gets the debt collector off your back.
How to Remove Collection Accounts
For FICO 8 scoring models or older, paying off a collection doesn’t improve your credit score. Instead, you’ll need to have the collection removed from your credit reports. Below are the three most common ways of accomplishing this.
Send a ‘Pay for Delete’ Letter
As part of your agreement to pay off the collection, you can request the account be removed from your credit reports.
To do this, you submit a “pay for delete” letter to the debt collection agency outlining how much you are going to pay to settle the account (debt settlement) and your request for the removal of the account from your credit reports.
You’ll want to receive a confirmation of the terms from the debt collector before you proceed with payment.
Collection agencies usually honor their word in this matter. Just be aware that this letter is in no way legally binding. Technically, collection agencies can accept payment and mark your collection as paid, but not remove the collections from your credit report.
Even if they do follow through, removing the collection will not remove the original late payment marks you received from the original creditor.
Disputing a Collection
If you believe the collection is in error, either because of fraud or because the collection agency can’t prove they own or have the right to collect the reported debt, then you can dispute the collection.
To dispute the debt collection, you’ll need to contact the credit bureau directly. Once you initiate a dispute, the collection agency will need to provide proof to the credit bureau of your debt. If they cannot do so in a timely manner, then the collection will be removed from your reports.
The dispute process could take several months, and you may need to provide supporting documentation of your claim. This process will need to be repeated for each credit reporting agency that shows the collection on their report.
How Long Do Collections Stay On Your Credit Report?
Generally speaking, a collection stays on your credit report for seven years past the original delinquency date. Your delinquency date will be based on how the original creditor reports.
For instance, the creditor could report you delinquent when you are 60 days late or when you are 180 days late.
So, if your delinquency date is May of 2020, then the collection will fall off your credit reports in June 2027.
Collections that are paid off will remain on your report for seven years unless you negotiate with the collection agencies and/or creditors in order to remove them.
The only thing that potentially changes the seven-year timeline is partial payments. Depending on which state you live in, a partial payment could reset the clock.
This means that the seven years start over, along with the statute of limitations, which opens you up to a lawsuit on the debt.
Considering this, if the statute of limitations on this debt is getting ready to expire, or the collection is approaching the seven-year mark, you’d be better off making no payment rather than agreeing to a payment plan.
Is it Better to Pay Off Collections or Wait?
If you have the money, you should pay it off through a “pay-for-delete” agreement. Aside from how it affects your credit, leaving the debt outstanding can open you up to a lawsuit, not to mention, frequent calls from debt collectors.
If you have multiple collections, prioritizing which ones to pay off first is best. In this case, ignoring small-value collections (less than $100) or medical debt in favor of paying off credit card collections can be a smart move.
Also, if you have collections that are getting ready to fall off your credit report, it makes more sense to work on paying off any newer collections while you wait for the old debt to age out.
Why Did My Credit Score Drop When I Paid Off Collections?
Usually, this is not a result of the collection account itself. There were likely other changes to your credit history that resulted in the credit score drop.
For instance, if you paid only the minimum payments on your credit card last month so that you could afford to pay off the collection, then the increase in your credit utilization ratio is likely to blame for your credit score decrease.
The scoring model you are viewing is also a factor. Since different scoring models weigh collections differently, you could see a drop in scores between models. This is most common when you go from viewing a newer scoring model to an older scoring model.
How Long After Paying Off Collections Can You Buy a House?
This depends on the lender.
Some lenders are willing to approve you for a mortgage even if you have a collection or two reporting, so long as you can prove you are working towards paying the collection off, or in the case of medical debt, recuperating the costs from your insurance provider.
If your lender requires the collection to be paid off before approving your mortgage, then you’ll want to wait until the collection is reported as paid. Or, if you requested a deletion, you’ll want to wait until the collection is removed from your credit reports.
It may take several months for a collection to appear as paid on your credit reports. And if you are having the tradeline deleted from your reports, this could take a few more months.
But it is worth the wait since interest rates for those with bad credit are much higher than those with good credit. Investing in credit repair now can save you thousands over the life of the mortgage.
Amanda Garland is a personal finance blogger living in Dallas, TX. 10 years ago she was living paycheck to paycheck and knew nothing about how credit works. She learned some hard lessons in her fight for financial stability. Now she has a friendly competition going with her husband to see who can reach a credit score of 850 first. She is also a poet, having obtained a Bachelor of Fine Arts degree in Creative Writing.