If You Pay Off the Debt Collectors, Will Your Credit Score Go Up?

Debt collectors can make life miserable for people who owe old bills. The Fair Debt Collection Practices Act forbids them from certain tactics, like making false threats or using obscene language, but they can verbally apply pressure. Collection accounts also lower a consumer's credit score, making it hard to get new credit at competitive interest rates. Paying off collection accounts raises the score under certain circumstances.

Definition

Every person who uses credit has a credit score from FICO and the three credit reporting agencies. All are three-digit numbers calculated from credit report information, according MyFICO.com. Lenders use them to assess if applicants are likely to pay back new accounts as agreed. Good data like long-term accounts with low balances and timely payment histories support a high score. High debt, erratic payments and charged-off accounts that were sold to debt collectors pull down the number and make it harder to get more credit.

Considerations

According to MSNMoney.com, lenders sometimes insist that applicants pay off old collection accounts before they grant credit. This requirement is especially common for large loans like mortgages. The loan is not granted until the old obligations are cleared up.

Process

Debt collectors buy old accounts at steep discounts, so they frequently accept less than the actual amount owed. They still earn a profit because they paid so little for the account. Consumers can use this to their advantage by negotiating lower settlements in exchange for having the debts erased from their credit reports. Collectors are more likely to agree to a discount when offered a lump sum rather than a payment plan.

Warning

Do not pay a bill until the debt collection puts the agreement in writing. The document should include the amount of the settlement, a promise that it will be accepted as payment in full for the debt and an agreement to remove the credit report entry when payment is made. Credit scores can still go down if a person pays an old debt and the collector does not remove it. The debts only loose their effect when they are removed.

Time Frame

Old credit card bills and other accounts can only stay in a person's credit history for seven years, according to the Federal Trade Commission. The time frame starts as soon as the account becomes delinquent, and it does not restart if the account is eventually turned over to a debt collector. Old debts do not affect credit scores very heavily if a consumer concentrated on keeping newer accounts in good standing. Accounts that are at least five years old may not be worth paying off if they are not impeding the ability to get more credit, since they will disappear within a couple of years.