What happens to your credit when you pay off collections accounts?

If you have one or more collections accounts on your credit report, you are probably wondering if paying them off will improve your credit score. The answer is, “It depends…”

Collections accounts are those accounts you have defaulted on, or stopped making payments on, that have been turned over from the original creditor to a collections agency. You probably already know that having collections accounts listed on your credit report are a cause of a low credit score or “bad credit.” That’s because lenders see you as a risk of someone who might not pay a debt. And, collections accounts generally stay on your credit report for 7 years from the original date you stopped paying on the account. Unless there is an error in the reporting of a collections account, creditors continue reporting on it to the credit bureaus every month, even if it was paid, as long as the information they are reporting is accurate. After the 7 years, these accounts will fall off your credit report whether they are paid or not paid.

How the credit scoring models view paid collections

The newest FICO score model, FICO Score 9, treats collections differently than previous FICO models in that it will ignore paid collections in the score calculation (and unpaid medical collections will have less of a score impact than previous models). Vantage Score 3.0 also ignores collections with a zero balance. So, the good news is that paying off a collection account will raise your credit score with these two new scoring models. The bad news is that most lenders and creditors are not using these new score models, with older FICO models currently in place, even though VantageScore use continues to grow.

One thing to remember with paid collections is that the further in the past it becomes, the more your score will rise going forward, little by little, if all positive credit factors such as on-time payments and low debt usage are followed.

Even though the newest credit scoring models may be ignoring paid collections, these accounts still appear in your credit file with the three major credit bureaus.

Or do they?

How the collections agencies view paid collections

The whole purpose to the practice of a collections agency reporting an unpaid debt to the credit bureau is to induce you to pay your debt or suffer this harmful blemish to your credit report. But once a debt is already reported to the credit bureaus, there’s not much incentive for you to pay. For collections agencies, they’ve accomplished their goal if they’ve gotten you to pay the debt in full or even on an agreement that the debt is satisfied for less than the full balance. Together with the newest credit scoring models, some collections agencies don’t see the need in continuing to report a debt that was paid. In fact, to stop reporting on it or have it removed from your credit report entirely might be an incentive for you to pay. In accordance with the Fair Credit Reporting Act, these creditors are obligated to report accounts accurately, which says nothing about not reporting the accounts at all.

Most collections accounts, even when paid, will stay on your credit report for the full 7 years, with a status marked, “paid.” The only time a creditor or collections agency is obligated to stop reporting your collections account and have it deleted from your credit reports is if there was an error in the reporting of the debt. You can dispute errors on your credit reports to have them removed. Beware though, that if the error was minor and clerical and you really do owe the debt, it can show up again the following month, this time reported accurately. If you still owe the debt, the collections agencies are required to report it.

But some collections agencies are recently more amenable to advising the credit bureau to delete your collections account entirely after they receive a full payment on a debt or you make an agreement with them to satisfy the debt for less than the full balance owed. Some say they will not report debts at all if satisfied within a specified short time period.

How the credit bureaus and lenders view paid collections

The credit bureaus are a service created for creditors and lenders to assess consumer debt risk, or the likelihood that any credit applicant will repay a debt. For them, the most important thing is to maintain a complete file of credit accounts and credit behavior for every consumer. Collections, whether paid or unpaid, represent a risk of repayment to a lender, so the lenders and the credit bureaus want to see collections accounts stay on the credit report, even when paid. For this reason the credit bureaus and the law makers disapprove of the practice to remove paid collections accounts from the credit report as it violates the contract creditors have with the credit bureaus to report accurate information, although the consumer is under no such obligation.

According to Experian, the practice of actually deleting the entire account and account history is rare. However, when considering paying off collections debts you owe that are hurting your credit score, it pays to ask the collections agency if they will have the record of the account deleted or removed from your credit file.

If a collections agency makes this agreement with you, be sure to verify which credit bureaus they report to and get the agreement in writing. If the paid account is removed from all three credit bureau files, your credit score will rise much faster than if it is not removed from your credit reports.


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