Does Paying Off Collection Accounts Raise Credit Scores?

A collection account appearing on credit reports is very harmful to credit scores. It indicates that a debtor failed to pay an account as agreed, forcing the creditor to close the account and list it as charged off. After that, the creditor transferred or sold the account to a debt collector, resulting in an update to credit reports noting the new status as a collection account. It is impossible to maintain an excellent credit score with active collection accounts on credit reports. However, paying off a collection account may not immediately increase scores.

Considerations

Experian, one of the major credit reporting agencies, recommends paying collection accounts. However, it also acknowledges that the payment may do nothing to increase credit scores over the short term. Most of the damage from a collection account occurs while the account is delinquent. Paying off the collection account cannot reverse the harm from the collections process, including late payments and a charge-off. Those negative credit entries remain on credit reports for seven years, although their impact on credit scores diminishes over time.

Credit Repair

The Federal Trade Commission recommends that people focus more on their future than on the past when trying to raise credit scores. The agency supports resolving old debts such as collection accounts, but points out that paying current bills on time while keeping balances low is the best way to raise credit scores over the long term.

Range

Credit scores range from 350 to 850, with scores of 720 or higher usually qualifying people for the best interest rates on mortgages and other loans. Some mortgage companies may not approve a person for a loan if the credit report shows active collection accounts. That is one reason for paying off collection accounts even if doing so does not significantly increase credit scores.

Updates

Once a debtor pays a collection account, credit reports update to show the account as a "paid collection account." That shows creditors that the debtor resolved the issue with the creditor or debt collector. The only other option in paying off a collection account is to negotiate removal of the information entirely from reports. This is possible under a process known as "pay for delete." Some debt collectors may agree to remove the collection account in exchange for full payment. However, not all debt collectors will agree because they feel the process is not fair to people who pay their bills on time. Removal of collection accounts from credit reports could lead to an immediate increase in your credit score.