Your credit score is based on a variety of factors, such as how long you've had credit and the type of debts your credit report reflects. Collection debts that appear in your credit record negatively impact your credit scores due to their status as derogatory accounts. While paying off collection accounts demonstrates financial responsibility, doing so may not improve your credit rating.
Paying Collection Debt
A common misconception exists among consumers that paying off collection accounts results in the collection agencies or the credit bureaus removing the negative information from the debtor's credit history. Unfortunately, this is not the case. The Fair Credit Reporting Act notes that, once inserted, a collection account will remain in your credit history for up to seven years -- depending on when you defaulted on the original debt. As long as a collection debt appears on your credit report it has a derogatory impact on your score -- whether the account remains unpaid or not.
Pay for Delete
Collection agencies sometimes entertain consumer offers to pay off the debt in exchange for credit report deletion. The "pay for delete" process, as it is known in the credit industry, benefits both the collection agency and the consumer. The collection agency receives payment, and the consumer receives a boost to his credit rating from the deletion of the derogatory account. Not all debt collectors accept pay for delete offers. Some view this as a violation of their contract with the credit bureaus. Of those that do accept pay for delete proposals, the consumer typically must pay off the debt in full or through a lump-sum settlement.
Paid Accounts
Even if a collection agency refuses to delete its derogatory collection notation on your credit report, paying off the debt is still in your best interest. Paying the debt prevents you from facing wage or bank account garnishment following a collection lawsuit, and the company will notify the credit bureaus that you paid off your bad debt. Provided you pay off the amount you owe in full, your credit file will update to "paid." Lenders who review your credit report will see that you satisfied your obligation to the collection agency. Even though your credit score remains imperfect, a paid collection looks better to lenders than an unpaid one.
Credit Score Increase
The amount you credit score will improve after a collection agency or the credit bureaus remove a collection account from your record varies depending on the age of the collection account and the other data present on your credit report. The older the collection account, the less impact it has on your scores, and the less your credit score will improve once it vanishes from your credit history. If your report reflects other derogatory information, such as missed payments to creditors or a bankruptcy, this also negatively impacts how much your credit rating will improve after having a collection account removed from your record.
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