Paying all or part of a debt that your creditor or lender sends to a collection agency won't raise your credit score. Even so, paying a collection account could prevent a collector from taking legal action against you, and full repayment could help you qualify for new loans.
Lenders
Paying off a collection account could have a positive impact on your credit report, but not your credit score. Lenders examine credit reports along with scores, because notations on reports reveal why a person has a low or high score. Collection accounts on reports inevitably drag down scores, but unpaid collection accounts may make the worst impression upon a lender, according to Bankrate.com writer Steve Bucci. He indicates that lenders determine whether loan applicants can be trusted to repay loans, and lenders won't be inclined to trust you if you have unpaid collection accounts.
Collection Settlements
Collection agencies allow some people to pay less than they owe to settle a debt, but that type of deal won't help your credit report or your credit score. A settlement would usually result in a "settled for less than full balance" notation on your report, rather than a "paid in full" notation. Therefore, paying less than you owe still shows a potential creditor or lender that you didn't fulfill your obligation to pay the entire debt. Nonetheless, you shouldn't commit to paying a collection agency more than you can afford, because an agency could eventually take legal action against you if you don't fulfill the payment arrangements you make.
Account Removal
A collector may promise to remove a collection account from your credit report if you pay what you owe in full. However, that agreement would likely do little to raise your credit score, because the collector can't remove negative marks on your credit file that the original creditor reported. Notations from the original creditor would include late payments you made on the account and that the account is in collections. Negative account information usually remains on consumers' credit reports for seven years.
Considerations
Keeping your other accounts in good standing is one of the best ways to improve your credit rating over time, even if you pay off or settle a collection account. Some lenders and creditors may be willing to overlook a collection account and approve a credit or loan application for you if you pay your other bills on time. The older a collection account is, the less impact it has on your credit rating if your other accounts are in good standing.
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