Often when we are conducting a free consultation with a person that wants to improve their credit score, they share with us that they have collections accounts. Then of course they ask us, how many points will my credit score increase when I pay off collections? Before I answer that question let's address whether you should pay collection accounts at all, and when to pay them.
What Should You Do If You Have Accounts in Collection?
Ignore a Collection Account
You have options. The first option is to ignore it. But this option brings the risk that the original creditor or collection agency that bought the debt from the original creditor will sue you. In most cases, you are more likely to be sued if the collection account has a high balance. However, in some cases, if you do nothing, the account simply remains on your credit report for up to 7 years from the date of the first delinquency. This will hurt your credit score, of course. But once the collection has aged you can dispute it and try to get it removed. More on that below.
Contact the Creditor
You can contact the creditor of record. The creditor of record will be either the original creditor or a collection agency. Sometimes it’s difficult to get the contact information of a collection agency even if the name of the company is listed on your credit report. When contacting a creditor (original or collection agency) you need to proceed with caution.
Don’t admit that you owe the debt until you have decided to pay it. When making contact you should simply state that you have received a collection notice or saw that a collection is on your credit report. Whichever is the case. But don’t admit that you owe it. If the creditor verifies that you owe the money over the phone, request that they send you the proof in writing that they own that account. This is called debt validation. There have been many scams where unscrupulous people send collection notices and try to get you to send money, but they don’t own that account. The creditor has 30 days to provide this proof in writing.
Should You Pay a Collection Account?
If you receive proof that you owe them money, what do you do next? You can pay the balance, negotiate a lower amount or payment plan, continue to ignore it, or dispute the account through the credit bureaus.
If You Pay the Collection Will Your Credit Score Improve?
If you have the money and want to pay the balance owed, know that it may or may not affect your credit reports and credit scores in a positive way. According to Experian, newer credit scoring models ignore collections that have a zero balance. These newer scoring models are FICO® 9, and the two newest versions of the VantageScore®, 3.0 and 4.0.
So, if a future creditor is using a newer scoring model, your score will improve. However, because older scoring models do not ignore paid collections, scores generated by these older models will not improve. Even Experian was using a previous scoring model as of March 2020, the FICO® 8 version, which does not ignore paid collections. Therefore, when paying off a collection, your Experian score will not improve. However, a more recent article on the Experian website states that they now use VantageScore 3.0.
But even if the credit bureaus (Experian, Equifax, and Transunion) use a newer scoring model which ignores paid collections, lenders do not. According to CNBC, as of December or 2020, mortgage lenders and banks are using older scoring models. Therefore, paying off a collection will only marginally help your ability to get credit in the future.
How Many Points Will My Credit Score Increase When I Pay Off My Collections? We answer that question below...
Can You Negotiate to Have the Account Reflect Positively or be Deleted?
Creditors know that most people are concerned with their credit scores. If they aren’t going to sue you, which in most cases they don’t, the only stick they have is your credit score. So, they will tell you what you want to hear to get you to pay. They’ll say things like, “we will change the status of this account on your credit report once you pay the balance”. You might think this means that it will say, “paid as agreed” or be deleted. It won’t. They will simply change the balance to zero. But it will still show that it was and is a collection account. There is a benefit to this that I will share with you below.
You can try to get them to agree to delete the account or change it to paid as agreed. But in most cases, they won’t do that. But whatever you negotiate, you need to get it in writing before you pay them.
As well, do not send them a check. Your checks have your bank and account information written on them. Do not give a collection agency your bank information. Instead, send them a cashier's check.
Can You Continue to Ignore the Collection?
Even if you get debt validation from the creditor, you can still choose to ignore it. As previously stated, you can potentially be sued for the debt. And it will still affect your credit scores. But if you don’t have the money to pay it, and your creditor won’t negotiate a payment plan, you have one other choice.
You Can Dispute a Collection Account
The only surefire way to improve your credit scores with the scoring models currently being used is to get the account removed. The only way to get it removed, unless you negotiate it in writing with the creditor, is to dispute it.
Why would you dispute an account that you know is yours? Because the law provides for the creditor to verify the accuracy of what they previously put on your credit report. Just as the law provides for the creditor to give you written notice that they own your debt.
You can dispute an account yourself. However, most disputes by consumers are responded to by the credit bureaus with no change. Why? Because consumers typically don’t dispute accounts with proper reasons and dispute codes.
This is where a reputable credit repair company comes in. Credit repair companies know how to dispute accounts because that’s what they do. When an account is disputed through the credit bureaus, they, in turn, must contact the creditor. If the creditor doesn’t respond to the credit bureaus within 30 days, the account must be removed.
Your Best Option to Increase Your Credit Score When Paying Off Collections
The best option if you can afford to do so, is to pay the balance of the collection account and then have a credit repair company dispute it for you. Even if the account will remain in a collection status on your credit report when you pay it, this gives you the best chance of getting the account removed. Why? Because when a paid account is disputed, the creditor will have little or no motivation to respond back to the credit bureaus. Again, if they don’t respond, the account must be deleted.
How Many Points Will My Credit Score Increase When I Pay Off Collections?
Unfortunately, it’s impossible to answer this question. The algorithms used by each of the scoring models are complex. And each is different. But just know that your score will improve. However, the biggest factor is that your creditworthiness in the eyes of future creditors will go up significantly. Anytime a loan underwriter sees a collection account on a credit report, it increases the chances that the loan will be denied. Or, they will then force you to pay the collection account before they fund the loan.