Does Paying Off a Collection Negatively Affect Your Credit Score?

When you are faced with debt collectors calling you, paying off your accounts may be at the top of your priority list. In this situation, besides just getting rid of the debt, you also have to consider how it can impact your credit score. When paying off your accounts, it should not negatively affect your credit score unless you close them after paying the balances.

Paying Off Old Items

When a debt gets to a certain age, it passes a statute of limitations. This statute of limitations is different for every state and once the time limit has passed, the collector cannot take you to court. However, this does not mean that you should not pay off the debt. Paying off old accounts cannot hurt your credit score, but it may not necessarily help it right away either. Once you pay off the debt, the creditor will report it to the credit bureaus as paid; however, accounts less than 7 years old will remain on your reports. But as MSN Money points out "any potential lender, landlord or employer would much rather see a paid collection account than an unpaid one."

Credit Utilization Ratio

One factor that must be considered in this situation is your credit utilization ratio. This is the ratio of the amount of debt you have in relation to the amount of available credit. If your credit utilization ratio is below a 35 percent, it helps your credit score. This means that paying your collection account balances down can actually boost your score in this regard. When creditors know that you have little debt, it makes you a more attractive borrower.

Closing Accounts

When you pay off your credit accounts, closing them could actually hurt your credit score. If an account is closed, it lessens the amount of available credit that you have. Even though you have less debt also, it can make the credit utilization ratio less attractive. Once your ratio rises above the 35 percent mark, it hurts your credit score and makes lenders think twice about extending credit to you. If the account is delinquent, the creditor may freeze it, which prevents you from accessing the rest of your credit limit. Once this happens, it can actually negatively affect your credit utilization ratio. Paying off the account, could help improve your ratio again. In some cases, the creditor may be willing to reinstate the account once you pay off the delinquent amount. When this happens, it can significantly improve your credit utilization ratio again.

Frequent Use

Once you pay off all of your collection accounts, you may be tempted to avoid using credit completely. While this can help you avoid paying interest and it can keep you out of debt, it can hurt your score. In this situation, using your credit accounts lightly but frequently can help boost your score. Once you make a purchase on your credit cards or other credit accounts, pay it off when the statement comes and your score will increase over time.