Will Taking Care of Collections Make My Credit Score Higher?

Seriously delinquent credit cards, loans and other accounts are often turned over to collection agencies. This lowers the consumer's credit score considerably, according to FICO, a major credit score provider. Taking care of collection accounts by paying them off does not necessarily undo the damage. Extra steps are necessary to repair the credit score.

Definition

A collection account is an unpaid account that has been charged off and turned over to a collections department or agency, Liz Pulliam Weston of MSN Money explains. When someone stops paying on a credit card or other unsecured debt, the creditor eventually writes it off in its records and reports it to the credit bureaus as a charge-off. Often it gives the charged-off account to its own collections department, hires a collection agency or sells it to an outside agency. This entity reports the negative information to the credit bureaus.

Time Frame

Pulliam Weston advises that many banks and other creditors charge off an account after six months of skipped payments. The account itself, including information on its bad status, remains on the consumer's credit report for seven years and affects the credit score for that entire time frame. FICO states that its influence goes down as time passes.

Solutions

Smart consumers can get collections removed from their credit reports, which raises their credit score, through negotiations. The creditor wants the money and may be willing to stop reporting the delinquent debt to the credit bureaus or report it in a neutral or positive way in return for payment. Pulliam Weston advises asking for a status of "paid in full" rather than "settled" if the collection agency will not stop reporting it entirely. The Credit Infocenter credit repair site recommends pushing for complete removal because "paid in full" still looks bad on credit reports when a collection agency is involved.

Considerations

Consumers should not inquire about collection accounts unless they are prepared to take care of them, according to Pulliam Weston. It takes negotiation to change the way the debt is reported, and the creditor may refuse to make the change. It may then renew its collection efforts because it knows the person who inquired has money and is concerned about credit records.

Warning

Paying off a collection account can sometimes hurt a consumer's credit score, Pulliam Weston warns. The company may promise to stop reporting the collection account or to list it as "paid in full" or some other positive designation, then never follow through. The pay-off makes the problem account seem more recent, which hurts the score. Always get a written agreement about account removal before taking care of a debt with a collection agency.