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Having a collection account reported to the credit bureaus is not good for your credit score. But having a collection account removed can be a good first step to take in credit repair.
How much your credit score will increase after a collection is deleted from your credit report varies depending on how old the collection is, the scoring model used, and the overall state of your credit. Depending on these factors, your score could increase by 100+ points or much less.
If you have multiple collections (and other derogatory marks) on your credit report, deleting an old collection account or deleting a paid collection account will have little to no impact on your credit score.
Alternatively, deleting a newer account, especially if it is your only derogatory mark, will dramatically improve your credit score.
How Do Collection Accounts Affect Your Credit Score?
A collection results when a debt remains unpaid for a period of time, usually 60+ days. This unpaid debt can include items like medical bills, student loans, utilities, credit card debt, etc.
Other types of debt are reported differently. I.E. Missing mortgage payments will result in foreclosure.
Once an unpaid bill reaches the 30+ days overdue point, the creditor/lender can at any point turn your information over to a collections agency. The collections agency then turns around and reports the collection information to the credit bureaus.
Once a collection appears on your credit report, it will have a negative impact on your credit score. Just how much your credit score will drop depends on what your current credit history looks like.
If you had a good credit score before the collection account hit your credit, then you’ll experience a significant dip to your credit score.
If you already had bad credit then the negative impact on your score will be less.
How recently the collections account was added to your credit report will determine how much of an impact the account has on your score. Newly added collection accounts have a bigger impact than older ones.
In addition to the collections account itself damaging your score, the reported late payments leading up to the account being sent to collections will also have a negative impact on your score as payment history makes up 35% of your overall credit score.
And it is not just your credit score that can be hurt by a collections account. Other lenders that you have open accounts with can take negative action by reducing your credit limit or outright closing your account (i.e. credit card).
And qualifying for any new credit lines will be nearly impossible while the collection remains unpaid.
Is Your Credit Score Affected by the Number of Collections?
Yes. The more you have, the worse it is for your credit score. Keep in mind that the age of the collections accounts matters just as much as the number of them.
While having multiple collections accounts isn’t good, the accounts are weighed more heavily if they are newer. So a collection account that first appeared on your credit report last month, will have a bigger impact than one that has been sitting on your report for 5 years.
Generally speaking, collections accounts that are two years or younger will have a bigger impact on your credit score than older accounts.
Considering this, if you have one or two collections accounts sitting on your credit report that are several years old, and a new one is added, then your credit score will take a hit.
But if you have three collections accounts on your credit report that are all 2+ years old, your credit score could actually start going up. Your older collection accounts hurt your credit score much less. This is assuming you don’t gain any new collections accounts.
Does the Amount of Collections Make a Difference?
In most cases, the amount of the collections doesn’t have an impact on your credit score.
When you are paying off a debt, the amount of it matters. The amount owed versus credit available is an important factor in your FICO score, accounting for 30% of your overall score.
But this is not the case for collections. Collections are counted as derogatory marks. The only information that is important is whether or not it is paid and how old the account is.
The exception arises for low-value collections. Newer scoring models will automatically exclude collection accounts that are less than $100. This means that these collection accounts won’t even be calculated on your credit score.
The downside is that not all lenders use the same scoring model. FICO 8 was the first scoring model to adopt this, so if the lender is using an older scoring model, even these small-value collections will impact your score.
Another factor worth mentioning is the type of collection. Laws were passed in 2014 that limited the impact of medical collections. There are now rules for credit reporting when it comes to medical debt.
Additionally, new scoring models (FICO 9) give less weight to collections for medical debt.
Benefits of Paying off Collection Accounts
A benefit of paying off a collections account would be to increase credit score, but this isn’t guaranteed.
Many of the old scoring models weigh unpaid collections and paid collections the same, meaning that paying one off doesn’t improve your credit score. And the paid collection account will remain on your credit for seven years (starting from the initial unpaid date).
Newer scoring models, like FICO 9 and FICO 10, ignore paid collections entirely, which means that paying off a collection account will increase your credit score.
In this case, if you have multiple collections, paying off the newer debts will result in a larger score increase than paying off older collection accounts.
Unfortunately, the most widely used scoring model is currently FICO 8, so don’t count on a credit score increase.
Still, even if paying off the collection account doesn’t come with a guaranteed credit score increase, there are other benefits to consider.
The major one would be preventing a lawsuit. Unpaid debt could land you in court if you are not careful.
Paying the collections off can also change how a lender views you. For instance, if you are attempting to get a mortgage, the bank may refuse to consider your application until you prove you are paying off the collection account.
It may also prevent other lenders/creditors from closing your account or reducing the credit limits on your credit cards.
When paying the collection, you also have the option of negotiating with the collection agency to settle the debt for less than the original value. So, by reaching out, you could save some money.
And the newer scoring models (FICO 9 and above) consider debt settlement the same as fully paid collections, so you will likely see a credit score increase.
How to Remove Collection Accounts
Instead of just paying the debt, you might want to look at options for removing the collection from your credit reports.
‘Pay for Delete’ Letter
When you are paying off a collection account, you have the option of negotiating the deletion of the collection account from your credit report.
To do this, you’ll need to send an official request, a pay for delete letter, to the debt collector. This letter needs to clearly outline how much you are paying and the stipulation for the account to be removed from your credit report.
You’ll then want confirmation in writing before you submit the payment. Once the agreed-upon amount is paid, it is up to the collection agency to delete the account from your credit.
Disputing a Collection
If the collection is in error, either because of identity theft, or another reason, then you’ll immediately want to initiate the dispute process.
This is done through each of the individual credit bureaus. For each credit reporting agency that this account appears on, you’ll need to open a dispute and argue your case for removal. The process may involve submitting paperwork and can take weeks to resolve.
Another reason to open a dispute is if the debt collector that reported the account fails to provide debt validation.
When a collections agency contacts you, before you agree to any kind of payment, you’ll want to send a debt validation request. The aim is to confirm the debt and have the debt collection agency prove that they have the right to collect on the debt.
Since collections are often resold, the agency contacting you may no longer retain the right to collect.
Collections have a significant impact on credit reporting. Just one collection account can drop your score by 100+ points.
When trying to improve your credit score, either by yourself or using a credit repair service, having a collection deleted from your report can help.
Deletion will require a dispute or an agreement with the collections agency and/or creditor, simply paying off the debt won’t get it deleted from your report.
And while paying off the debt is a good thing, when it comes to credit reporting, collections are often weighed the same whether they are paid or not, though this varies with different scoring models.
But even if your score doesn’t improve, setting up a payment plan or paying off the collections debt can still be beneficial in preventing negative action from being taken on your other credit accounts and save you from a lawsuit.
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.