Will Paying Off Collections Help My Credit Score?

Data that affects your credit score comes from your Experian, Equifax and TransUnion credit reports. Collection agencies report to the credit bureaus, and collection accounts are part of your payment history, along with payment dates, charge-offs and judgments. Together those items are 35 percent of your total score, according the MyFICO scoring website. A collection account payoff helps your score if you do it correctly.

Definition

Collections means a bill, such as a credit card account, medical expense or other financial obligation, has moved from the original creditor to a professional debt collector. MSN Money writer Liz Pulliam Weston explains that credit card companies usually wait about six months to write off debts and sell them to collectors. The original account, including late payments and the charge-off, stays on your Experian, Equifax and TransUnion credit reports, and the collection agency adds another entry that does additional harm to your credit score.

Settlement

Debt collectors use various techniques, from frequent phone calls and letters to lawsuits and court judgments, to get money from you. They pay less than face value for accounts, so they make money even if they settle for a reduced amount. Settling a collection account for some or all of the original bill only helps your credit score if you include the way in which your payment is reported to the credit bureaus in your negotiations, according to Bankrate's Brigitte Yuille.

Negotiation

Tell the debt collector you want the collection account entry completely removed from your Experian, Equifax and TransUnion credit reports rather than marked "paid" or "settled" because it hurts your credit score even if it shows that you paid. Get a written agreement that includes the settlement amount and the agreement to alter your reports before you tender any money to the collection agency, Yuille advises. Verbal promises are unenforceable.

Verification

AnnualCreditReport.com provides a no-cost method for verifying that the debt collector followed through with its promise. The Federal Trade Commission explains that this website gives you yearly free credit reports. Look for the collection account and dispute it with the credit bureaus if it still appears once it is paid per the agreement. Mail the disputes and include a copy of the written agreement.

Warning

Never make a settlement on an account that is past the statute of limitations for debt collection in your state. The NOLO legal website explains that scavenger debt collectors aggressively pursue these bills even though they have no legal way to force your payment. Old debts no longer affect your credit score, and you cannot be sued for the money, so there is no benefit to pay them off.