Will Paying Off Charge Offs & Collections Boost My Credit Score?

Financial experts, such as Steve Bucci of Bankrate, say that paying a charge-off or collection account does not affect your credit score, but in some circumstances it might. However, the effect on your credit score usually is negligible. Far more important to creditors is the fact that you paid a collection or charge-off.

Identification

The status on a charge-off or collection account -- paid or unpaid -- does not affect your credit score; the credit scoring model looks at all such accounts as a negative. However, the outstanding balance on these accounts can affect your score, because the FICO credit scoring model counts unpaid collections and charge-off accounts in the "amounts owed" variable. Your total amount of unpaid debt counts for 30 percent of your FICO score, so paying these accounts could significantly boost your credit score if they comprise most of your debt.

Other Benefits

Some creditors may focus more on your actual credit history than on your credit risk rating. If you pay off a collection or charge-off, your lender may consider you a better risk than what your credit score states, because paying an old debt shows you follow through on a commitment to pay back money your borrow. Settling the old debts also means the creditor cannot surprise you with a bank seizure, wage salary or other judgment that could impact your ability to repay future debt.

Considerations

You might do better to let a collection account or charge-off go unpaid if it is close to the federal credit reporting time limit. Both type of accounts can only stay on your credit report for seven years after the first delinquency. Even if you have several years left until the accounts fall off your report, the money you spend to repay the debts might benefit you more if you use it to keep current on other debts and prevent more defaults.

Tips

Dispute the negative accounts if you think there might be an error or the creditor or collections agency did not keep proper records. Creditors must report accurate information and be able to verify the facts they report to the major crediting bureaus. You can also try to settle for less than the full amount, but make sure to get a commitment in writing that the creditor will report the account as "paid as agreed" before remitting payment.