Credit Repair

What Paying Off Collections Accounts Does to Your Credit

It’s not a day anyone looks forward to, but it happens: You couldn’t keep up with your bills, and now a collection agency is calling. Does that mean your credit is doomed forever?

In short, no. While it can certainly do some damage, there are steps you can take that may lessen the blow of having a debt in collections. Here’s what you need to know about how collections affect your credit, and what you can do about it.

How collections affect your credit score

When it comes to your credit, it’s all about the score — your credit score that is. The most widely used one is the FICO Score, produced by the Fair Isaac Corporation. FICO Scores are used in more than 90% of lending decisions, including to determine your eligibility for loans and credit, as well as your interest rate and other terms. This three-digit number is based on five different factors found in your credit reports, the most important of which is your payment history.

Because collections — which are essentially lapsed payments — remain on your credit report for seven years, it’s easy to see how they can drive your score downward. How much? That depends because all collections aren’t weighed the same. Calculations are made based on a variety of factors, including the amount of the debt, the type of debt, how old the debt is and whether you’ve paid it off. Dan Grote, a certified financial planner and partner with Latitude Financial Group in Denver, said it also depends on how good your credit is in the first place: The higher your score, the further it will probably fall.

“If you had a lower credit score to begin with, then the impact of one collection may be lesser than if you had pristine credit,” he said. “So, if your credit score was in the upper 700s and something got away from you or slipped through the cracks, that impact is likely going to be more substantial.”

You need to know where you stand with your credit, especially if you have bills in collection. You also want to make sure there are no errors. According to a report by the Federal Trade Commission, more than 1 in 5 consumers have errors on their credit reports, and you don’t want to get dinged for additional debt that’s not even yours.

Checking your credit is easy. You can check your credit reports for free once a year at to see your major credit scores. You can also use LendingTree’s credit score tool.

If you do find any erroneous reports, you’ll quickly want to dispute them. But if the debts are truly yours, then there are good reasons to try paying them off as quickly as possible.

How your paid-off debt can affect your credit

So, if you pay off your debt in full, will your credit score bounce right back? The answer depends largely on which credit score you’re talking about. While most lenders use FICO, there are various versions that treat paid collections differently. For example, in earlier versions, your FICO Score was dependent only on two things — whether a collection had been reported and, if it had, how long ago. Believe it or not, whether it had been paid had no impact on your score. However, the latest version, the FICO Score 9, disregards collections that have been paid off. Note also that in this new version, medical collections don’t have as significant an effect on your score as other debt, such as credit card debt.

To cover your bases, you may want to request a goodwill deletion to have a collection removed from your credit report. To do so, contact the collection agency and make a case for why it should grant you some mercy and have the collection removed from your report. They’re under no obligation to do so, but it can’t hurt to ask, especially if you have already settled the debt with them.

How to pay off debt in collections if you still owe more

If you haven’t paid off your collections debts yet, it’s important to come up with a plan to do so while still paying all your other bills on time. There are several options to consider that may help.

1. Debt settlement

The good news is there’s typically more flexibility when it comes to paying off collections than with other debt. Collections agencies purchase debt from lenders, often at a fraction of the price, so they’re usually willing to accept less than the full amount of the debt. For example, if you owe $1,000, they may agree to let you off the hook for $600 — because they may have acquired it for just $500. If you need help negotiating a deal, there are debt settlement companies that may be able to help.

2. Payment plan

If you can’t pay your debt in full, then you can attempt to work with the collections agency to set up a payment plan. Again, they will be happy to be getting something rather than nothing.

3. Debt consolidation loan

If you have multiple debts, you may also want to consider a debt consolidation loan. This allows you to roll multiple debts into one loan. That loan will often have a lower interest rate than your current debt and allow you to make one monthly payment instead of several.

If you need help with any of the above, or with finding another solution, you may want to consider credit counseling. The Department of Justice provides a database of approved credit counseling agencies, which you can search by state or judicial district.

As for finding the funds once you have a plan in place, Grote said you may need to get resourceful. But doing so now will reduce the time it takes to get your credit back on track.

“My advice to anyone with debt in collections is to do anything and everything they can possibly do to pay that particular bill off,” Grote said. He suggested selling unused items around the house or cutting the cord on cable. “Your No. 1 priority besides having a small emergency savings reserve should be to eliminate all non-mortgage debt.”

The bottom line

The best way to protect your credit is not to let your bills go to collection in the first place. But if you do end up with a collection agency calling, don’t just throw your hands up in despair. There are steps you can and should take to minimize the damage and repair your credit. And the sooner you act, the better.


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