Does Paying Bill Collectors Raise Your Credit?

Paying bill collectors is good for your credit -- but don't expect an immediate improvement in your credit score. Credit scores range from 350 to 850, with scores of 720 or higher considered excellent. People with lots of late payments on their credit report, along with charge-offs and collection accounts, usually have poorer scores -- 620 or lower. Paying a delinquent bill to a bill collector will not immediately reverse the damage from all the late payments and other negative credit information. However, paying a debt to a bill collector is an important part of a long-term credit repair strategy.

Definition

A charge-off is a credit account that the creditor deemed noncollectable. The creditor usually takes this action after the account falls past due by three months or longer. Charge offs remain on credit reports for seven years and are very damaging to credit because they indicate that a debtor failed to pay on an account as agreed. Collection accounts are accounts the creditors assigned or sold to a debt collector. Notations about collection accounts also remain on credit reports for seven years and hurt credit scores.

Considerations

Experian, one of the major credit reporting bureaus, reports that a collection account "is as negative as it gets," short of bankruptcy. The agency maintains that so much damage is caused by a collection account that a debtor's credit score is not likely to increase by much, even after the debtor pays off the collection account.

Settlement

Some people resolve accounts with bill collectors through debt settlement. Settlement allows the debtor to pay off the account for less than the full balance. SmartMoney.com reports that bill collectors often will accept 20 to 70 percent of the balance to pay off collection accounts. Debtors who want to pay the account in full, perhaps for ethical or moral reasons, are free to do so. But Experian maintains that credit scores are not likely to immediately improve if the debtor settles for less than the balance or pays the entire amount.

Rehabilitation

The best cure for damaged credit scores is to rehabilitate credit over two or three years. People rebuilding credit often open new accounts, such as secured credit cards, and make charges for necessities each month. They pay the balances in full each month or carry tiny balances, such as 10 percent of the credit limit. Later, they may add an installment account by placing money in a bank account and offering the savings as collateral. That makes credit approval easier. Gradually, the debtor adds other credit cards or installment loans and makes regular payments on them to improve credit scores. A secured credit card looks and works like a regular MasterCard or Visa but is secured by a deposit in a bank savings account.