How Does Paying Off Collections Improve Your Credit Score?

Understanding what is on your credit report is an essential first step when it comes to improving your credit score. Any collection accounts for unpaid debts will appear on your report in addition to your credit card, mortgage and student loan balances.

The presence of collection accounts can significantly impact your score and a lenders’ willingness to let you open an account with them.

Because of this, if you currently have an account that has gone to collections, you may be asking, “Does paying off collections improve your credit score?”

Collections affect your creditworthiness, and understanding how to deal with unpaid collection accounts is essential for sound debt management.

We’ll explain the ways collections can impact your credit and how paying them off might improve your score.

How do collection accounts affect your credit?

When you have an account past due for more than 120 days, the original creditor may turn to a debt collector to receive payment. A collection account will subsequently appear on your credit report, indicating that you defaulted on a debt and that the original lender had to sell it to a collection agency.

Collection accounts can stay on your credit report for up to seven years after the original date of delinquency as part of the Fair Credit Reporting Act (FCRA). This applies to credit card debt, mortgages, car loans, student loans and other payments.

Unfortunately, collection accounts fall under the “payment history” portion of your credit report, which accounts for 35% of your total FICO credit score. This is the largest factor in determining your score, so an account that has gone to collections can easily lower your credit rating.

When you apply for a new account and lenders request your credit report from Equifax, Experian or TransUnion, some may refuse to lend to you based on the presence of an unpaid collection account, regardless of your score.

An account that goes to collections has the greatest negative impact on your FICO Score when it first appears on your credit report.

Does paying off collections improve your credit score?

There isn’t a direct yes or no answer as to whether paying off collections will immediately impact your credit score. It ultimately depends on the credit scoring model that is being used by the lender or credit bureau.

The newest credit scoring models — FICO 9 and VantageScore 3.0 and 4.0 — see the biggest credit score impact for paid collection accounts. They also give less weight to medical bill debt. Under these scoring models, a paid collection account will not hurt your credit score. 

For example, suppose you pay the account off completely so that it has a zero balance. It will no longer negatively affect your score, even though it can show up on a credit report until the seven-year statute of limitations runs out.

For credit bureaus that use older scoring models, such as FICO 8, paying off a collection account to a debt settlement agency will not make a noticeable difference. This is because older scoring models still view paid collection accounts as a negative item on your report, even though they no longer have a balance.

As a result, a borrower’s ability to obtain a new credit account after having a debt go to collections partly depends on which scoring model is being used. Even though FICO 9 was introduced to lenders in 2014, the older FICO 8 model is still widely used.

Other credit score considerations for collection accounts

While paying off your collections debt doesn’t guarantee a good credit score, the collection account will at least be updated to “settled” or “paid in full.” 

Depending on the type of credit you are applying for in the future, lenders may look at more than just the score and want to see the status of your accounts. The fact that a collection account has been paid off illustrates financial responsibility and could make them more willing to lend.

After paying off a collection account, you can negotiate with the lender or collections agency to remove the account from your report. Your creditor may be willing to provide a goodwill deletion if you’re a long-term client with a good payment history.

After seven years, the collection account will disappear from your credit report entirely and will no longer affect your score. Even before this point, its negative impact on your score will gradually decrease, especially as you keep up with monthly payments on other accounts and maintain a good credit utilization ratio.

While many lenders still use the older FICO 8 model, more are expected to transition to FICO 9 in the future. By paying off your collection accounts now, they will have less of an impact on your ability to obtain new credit as more lenders transition to this scoring model.

Personal finance reasons to pay off collection accounts

Regardless of which credit scoring model a lender uses, it is still a good personal finance principle to pay off a collection account as swiftly as possible.

An unpaid debt could result in legal action if you fail to respond to the debt collector in a timely manner. A debt collection lawsuit will become far more costly than the original debt and could even result in wage garnishment to pay off the account.

Many collection accounts continue to apply additional interest and fees until you pay them off — even if the debt collection agency sells your debt to another agency. The longer you wait, the more expensive the total debt will become.

At the same time, you should be mindful of your other accounts so that they don’t become overdue or go into collections. Even if you can only make the minimum payment, avoiding the negative marks for late or delinquent payments is best for your long-term financial health.

On an everyday level, paying off a collection account will make life a lot less stressful. And you’ll no longer have to deal with letters, phone calls and more from the collectors.

Don’t let collections hurt your credit score

Unfortunately, paying off collections may not result in an instant improvement to your credit score. However, there’s no denying the peace of mind and long-term benefits that come from no longer needing to deal with collections agencies.

Regardless of your debt status, the sooner you pay off late payments and accounts that have gone to a debt collection agency, the better.

If you need help getting a handle on your debt, check out the Tally† app. Our convenient app rolls your credit cards into a single payment plan with a lower-interest line of credit so you can pay off high-interest accounts faster and potentially improve credit scoring factors.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.