Will paying off a collection account improve your credit score?

If you get calls from debt collectors about unpaid credit cards or other bills, you may be wondering how those collection accounts will affect your credit score. Generally, a newer collection account will do more damage to your FICO score.

The new grading models ignore paid collections. But lenders can’t, and paying could improve your chances of approval when you want a mortgage or car loan.

Here’s what you need to know about paying collection debts, including reasons to pay off a collection account and what can happen to your credit if you do.

What is a collection account?

If you are late, the creditor can send the debt to a collection agency or sell it to a debt buyer. This can happen a few months after you started missing payments or failing to pay the minimum amount.

You will usually receive letters or calls from your credit card company or lender to notify you before your debt is sent to a collection agency. When your debt is sent to collections, you are still legally obligated to pay it.

Debt collectors can make calls, send letters, emails, or texts, and even use direct messages on social media to contact you about the money you owe.

How will a debt in collections affect your credit?

A collections account can hurt your credit score, but the extent of the damage depends on where your score was before the debt was sent to collections.

“The better your score, the bigger the drop will be,” says Leslie Tayne, a financial attorney and founder and chief executive of New York’s Tayne Law Group. “If you have a credit score of 740 you will see more of a drop than someone with a score of 640 because there is more room for the numbers to drop.”

Collectors can report collection accounts to one, two or all three credit bureaus. Collections generally stay on your credit file for seven years from the date of the initial default or the first late payment in a series.

A collection account hurts your score the most right after it’s been reported and when the debt collector is actively pursuing payment, says Nathalie Noisette, founder of credit repair company Credit Conversion. “Fortunately, the impact fades over time,” says Noisette.

If you pay other credit cards and bills on time, it will boost your credit score despite the collection debt, Noisette adds. “It can counteract the negative impact,” she says.

Can your credit improve if you pay your collection account?

Reimbursing a collection account will mark the account as “paid” on your credit report, but the effect on your credit depends on the scoring model. Some credit score models ignore zero-balance debt collections and treat certain types of debt differently than others.

If you pay the account, however, it will not be deleted from your credit report.

Here’s what to expect from the latest credit score models:

  • VantageScore 3.0 and 4.0 ignore paid collection accounts and medical debts directly reported by a medical facility or service provider.
  • FICO 8, 9 and 10 ignore collections below $100.
  • FICO 9 and 10 ignore paid collection accounts and unpaid medical collections have less effect than in previous versions.

Any third-party collection is considered negative in scoring models prior to FICO 8.

What are your debt collection rights?

A federal law called the Fair Debt Collection Practices Act limits what debt collectors can do and provides protection against abusive, unfair or deceptive collection practices. The law covers auto and student loans, medical bills and credit cards, mortgages and other household debts, but not business debts.

Here’s what debt collectors can and can’t do under the law:

  • They cannot contact you anytime or anywhere. Debt collectors can’t contact you before 8 a.m. or after 9 p.m. unless you say it’s OK. They can’t contact you if you tell them in writing to stop, and they can’t contact you at work if you tell them you can’t receive calls there.
  • They must provide information to validate your debt. This includes how much you owe, the name of the creditor or how to get it, and what to do if you think the debt is not yours.
  • They cannot discuss your debt with anyone other than you or your spouse. If you told the debt collector that a lawyer is representing you, the debt collector should contact the lawyer.
  • They cannot call you repeatedly. A debt collector cannot call you more than seven times in a seven day period or within seven days of having a phone conversation with you about a particular debt.
  • They must respect certain rules to communicate on social networks. Messages must be private, debt collectors must identify themselves, and they must offer you a way to opt out of receiving communications.
  • They cannot harass you, lie to you, or treat you unfairly. Debt collectors cannot threaten to hurt you, use obscene language, or call repeatedly to harass you. They can’t demand that you pay more than you owe or pretend to be someone else, like a lawyer. Collection agents also cannot publicly reveal your debts by sending postcards or putting information on envelopes.

When to repay a collection account

Paying a collection account will not immediately cure your credit but may provide other benefits. You may want to pay a collection account for:

  • Avoid a lawsuit. The debt collector could sue you for the money you owe if your debt has not passed the statute of limitations. Paying off your account can help you avoid a lawsuit and wage garnishment.
  • Avoid extra charges. You can minimize interest charges and other charges permitted by law or the original agreement with the creditor.
  • Prepare to qualify for a loan. A lender may expect you to repay a collection account before approving a loan. “If you’re trying to acquire a mortgage, deleting or paying off a collection account is essential because the #1 factor lenders look for for approval is your payment history,” says Noisette. Medical collections do not need to be paid for FHA loan approval, but your lender may require it.

How to improve your credit score after a collection

With a little effort, you can overcome the damage of a collection account. A few steps to follow:

Challenge errors. If a collection is not yours or is reported incorrectly, you can dispute the error with the credit bureaus. Credit bureaus have dispute forms on their websites. You can also view the Federal Trade Commission’s Sample Dispute Letters. The bureaus have 45 days to investigate and then let you know if they will update or remove the information from your credit report.

Get positive information on your credit report. Pay other credit cards or loans on time. If all of your accounts have been sent for collection and you’re having trouble getting credit, you may need to open a secured credit card.

Be patient. Your credit score should start to improve as you consistently pay your bills on time and practice other good credit habits, like keeping balances low. Also, hang in there if your account is nearly 7 years old, as the account should soon disappear from your credit report.