Does Paying Off Debt in Collections Improve Your Credit Score?

If you have accounts that have been sent to collections, you may be wondering how paying off that debt will affect your credit score. Paying off collections may potentially improve your credit score over time, but the exact impact on your score depends on several factors, including the credit model (FICO® or VantageScore®) used.

While there's no guarantee that paying off debt in collections will improve your credit score, resolving past-due accounts can help you take care of what you owe, reduce your overall debt and become part of a broader plan to rebuild your credit.

What is a collection account?

A collection account is an unpaid, long-overdue debt that a creditor has transferred to an in-house collections department or sold to a third-party collection agency. Creditors typically send accounts to debt collectors when they’re in default or more than 120 days past due.¹ At that point, the original creditor may charge off the account, which means they close the account, write off the outstanding debt as uncollectible and report it to major credit-reporting agencies.

A charged-off account doesn't mean your debt disappears. When a debt is in collections, you may still be legally responsible for repaying what you owe.

How does a collection account affect your credit score?

Having debt in collections shows a history of late or missed payments, which could seriously harm your credit score. That’s because your payment history, which includes payments you’ve missed, accounts for about 35% of your credit score, depending on the credit scoring model used.² Collection accounts may stay on your credit report for up to seven years from the date of the first delinquent payment.³

Will paying off debt collectors improve your credit score?

Paying off debt collectors doesn't guarantee a credit score increase, but it is possible. Some credit scoring models penalize unpaid collection accounts more heavily than paid ones. Under those models, paying off those unpaid collection accounts may help improve your credit score.⁴

Whether or not your score improves after paying off a collections account depends on a few factors including:⁵

• Which credit scoring model was used: Newer scoring models like FICO® Score 9, FICO® Score 10 and VantageScore 3.0 and 4.0 only factor in unpaid collection accounts when calculating your score. Older models, like the widely used FICO® Score 8, may still factor in a collection account regardless of whether it's paid or unpaid.
• Whether the collection is labeled paid or settled or was removed: How an account is resolved could affect how it's weighed by different scoring models.⁶ Your credit score may also recover once the debt eventually rolls off your credit report.
• Your overall credit profile: The rest of your credit history, including the age of your other accounts, payment history and your overall credit utilization, all play a role in how much any single account impacts your score.

Why should you pay debt collectors if it doesn't improve your credit score?

Paying off a collection account may be a positive step, even if your credit score doesn't improve immediately. Resolving old debts could:

• Improve how lenders view your credit report: A paid collection account may increase your chances of getting approved for new credit in the future compared to an unpaid one.⁷
• Prevent ongoing collection activity: Paying a collection account will stop debt collectors from contacting you about that debt.
• Avoid potential legal consequences: If you ignore a debt collector’s attempts to contact you and don’t repay your debt, they may attempt to take legal action to collect it.

How long does it take for your credit report to update after paying debt collectors?

Once you pay off a collection account, the lender should report the debt to the three major credit bureaus as paid, but don't expect your credit report to reflect the change overnight. The process of updating your credit score could take several weeks. If you want to confirm the update has been made, you could check your credit report for free at AnnualCreditReport.com after a few weeks to see whether the account status has changed.

How else can you improve your credit score?

Paying off debt in collections is a meaningful step, but it's just one part of a broader credit-building strategy. For a deeper look at what you could do, here are some tips to improve your credit score.

Pay off other debts, not just those in collections

Consider using one of these popular debt management strategies to tackle your remaining balances.

• Snowball method: Pay extra toward your smallest balance first to build momentum, then, once it’s paid off, roll those extra payments toward the next-smallest debt.
• Avalanche method: Focus on paying extra toward the debt with the highest interest rate first to reduce the total amount you pay overall. Then, when it’s paid off, put those extra payments toward your debt with the next-highest interest rate.

Regardless of which method you choose, be sure to stay on top of all the required payments for all your debts to avoid late penalties and damage to your credit score.

Practice responsible credit habits

Paying your bills on time, every time, is one of the best habits you can have if you want to improve your credit score. Keeping your credit card balances below 30% of your available credit may also help significantly. When possible, consider paying your credit card balances in full to avoid carrying high balances.

Only apply for credit you need

Each time you apply for new credit, it triggers a hard inquiry on your credit report, which may temporarily impact your credit score. Limiting how often you apply for new credit could protect your score while lowering the risk of overspending.

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Focus on managing debt responsibly

Paying off a collection account is usually a good idea, but it isn’t guaranteed to improve your credit score — or, if it does, it may not improve it immediately. How your credit score changes depends on factors like which credit scoring models lenders use, when the account is updated and what your overall credit history looks like.

But when you combine it with other responsible credit habits and a plan to resolve your other debts, paying off collection accounts could help show lenders you've addressed past issues and are committed to building a stronger financial foundation.

Sources

1 https://www.experian.com/blogs/ask-experian/what-type-of-debt-can-go-to-collections/
2, 4, 5 https://www.experian.com/blogs/ask-experian/can-paying-off-collections-raise-your-credit-score/
3 https://www.nerdwallet.com/finance/learn/debt-collection-credit-report
6 https://www.experian.com/blogs/ask-experian/is-it-better-to-pay-off-bad-debt-or-to-settle-it/
7 https://www.nfcc.org/blog/ask-expert-can-improve-credit-score