How Much Will a Credit Score Increase With Paid Collections?

Paying collections is one of the toughest choices to make for a person's credit history, because it may not improve a credit score but likely improves the creditworthiness of the borrower. More important than the impact on a credit score is how future lenders look at paid collections. Also, avoid settling, because this just puts a further drain on a credit history.

Identification

A fully paid collections account has a minimal impact on a credit score, because the important thing is that the borrower broke the terms of the agreement in the first place, according to Experian. Paying a collections only helps in the outstanding debt category of the FICO score formula. Collection accounts are the second closest thing to a bankruptcy, so eliminating some debt from a credit profile is not effective in raising a score much, because the FICO formulas responds more to negative items.

Warning

When a borrower agrees to anything with a collection agency, he should always get the terms in writing. Even if the borrower pays in full, he should get a statement that the agency will report the item as "paid as agreed." Settling for less than the balance damages a credit score, because it shows up as a debt settlement, which can cause up to 125 points in damage, according to Bankrate.com. Sometimes, if the borrower agrees to pay in full, he can negotiate for a deletion of the account.

Considerations

Future lenders will probably give extra consideration to an applicant with a low score if he pays off a collection account, because it shows integrity and desire to pay off debt. This is especially true for lenders that look at credit reports as part of the underwriting process, such as mortgage providers, and lenders the borrower deals with face-to-face. Some borrowers may feel more confident about their finances by paying an old debt.

Tip

The Fair Isaac Corp. released a reworked versions of its widely used FICO scoring system in 2008. FICO 8 ignores collection accounts with an original balance under $100, according to Ellen Cannon of Bankrate.com. In this case, paying a collection under $100 only helps loan approval chances if the lender requires it or wants to see even the smallest debt repaid.