Whether you're in debt to a lender or to a collection agency, it will hurt your credit score. Paying down that debt or clearing it completely will raise your credit score. However, the record of the collection will stay on your credit report for years after you've settled the account. Depending on your credit situation, you may be able to get the collection removed from your report by negotiating with the agency.
Calculating Credit Scores
Each of the three credit bureaus -- Experian, TransUnion and Equifax -- uses a slightly different formula to calculate your credit score. As a result, you don't have a single credit score, you have at least three. The information that goes into calculating the score is largely the same, though it's weighed differently. Approximately 35 percent of the score is based on your repayment history. About 30 percent of the score factors in your total debt as a percentage of your credit line. Fifteen percent of the score is based on the length of your credit history and10 percent is based new credit applications. The remaining 10 percent is made up of various factors, including the types of debt you have.
Paying Off Collection Accounts
Paying down or paying off your debt will improve your debt-to-credit ratio, as long as you don't cancel all the accounts as soon as you settle. It will also have a positive effect on your overall total debt. However, it will not erase a record of that debt. A collection can stay on your credit report for up to seven years, even if you've paid it off. Collection agencies are under no obligation to remove that information from your credit report. It's not in their interest to do so. They use your dropping credit score as an incentive for you to pay up.
Negotiating With Collection Agencies
It is possible to negotiate with a collection agency to get the agency to remove the collection from your credit report. The agency bought your debt from a lender. It now has to get that money back from you. If you don't pay, the agency loses money. If you can pay off the debt, use that to negotiate with the agency. Tell the agency that you will pay everything you owe, but in return, you want the collection account removed from your credit report. Get this in writing before you pay. A settled collection account is not the same as an erased one. Insist on the latter.
Warning
The collection agency does not have to agree to your request. The agency can get the money in other ways. You are offering the agency an easier way. Despite this, the collection agency may turn you down. In that case, it's still better for you to pay off the debt than not to pay it. A settled collection account hurts your score less than if you still owe money.
Raising Your Score
There are other ways to raise your credit score over time. Keep up with your monthly repayments because a missed payment, or even a late one, can seriously hurt your score. Two years of regular monthly payments will make a settled collection account count for less than if you get yourself into more debt. Diversifying your debt and avoiding multiple credit applications in a single month will also help your score.
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