Does Paying a Collection Agency Improve Your Credit Score
A collection account
is to an extent the worst negative indicator on your credit account, because it means an account that is very past the due date for payment. If you are already a couple of moths late on your payment, be it a medical bill, a credit card
or a phone bill, your creditor can place collection status on your account. Sometimes, consumers have already paid their dues and have to prove the case. On other occasions, borrowers simply cannot keep up with their monthly payments and a collection account may be opened by the creditor. Keep in mind that if you have a collection on your report, your credit score
may drop by 50 or more points.
Such debts are usually forwarded to a collection agency and reported to a credit reporting agency
. Information about a debt collection on the report is very likely to dissuade banks from giving you another loan. It is one thing if you have an occasional late payment
– potential creditors will still be on the alert when granting you a loan. A collection account, however, is a sign that you are a risky borrower.
To compensate for it and fix your credit score, you should have the collection accounts deleted from it or put as “Current” or “Paid”. It is not enough to just pay off the accounts
to improve your credit score. In fact, some consider it as having an unpaid collection in the first place. The reason is that what diminishes your credit score is not as much the amount of unpaid debt, but rather the time, when it was reported. Your trade line, including the records about balance, credit limit, rating, account type, creditor and the last date of payments, becomes zero once your accounts go to a collection agency.
There are several important determinants when considering paying off the collection accounts and improving the credit score. First, it is important to look at the age of the debt
– the older it is, the least it affects your credit score. As a rule, regular repayments on long term loans indicate that you are a trustworthy borrower. However, paying off a loan is a bit tricky – if you do it now, this will actually turn the loan into a recent record. As such, it will have a negative impact on the credit score. The credit report shows updates on loan repayments in about two months, whereas the negative activity remains on the report for seven to eight years. If the derogatory record is not dropped from the report after this period, you have to get in tough and dispute the information with the agency. When it is erased from the report, however, this does little for the improvement of your credit score. However, new credit systems have been developed, like Fair Isaac, which neutralize this negative effect, since they make a distinction between new payments and new debts.
The ideal way to pay off the debt would be to negotiate a deletion of the account from your credit report. This has to be be done via a written request to the agency. You may have to offer a settlement payment in exchange for taking down the account from the report. If the collector insists on paying in full and will not accept only a settlement payment, you could negotiate this in exchange of collection account removal. If for some reason you cannot get the entry deleted, it is an acceptable approach to update it as ‘Paid” by offering a settlement payment. If you actually pay the amount in full, make sure the collector updates the status of the account.