How Much Will I Improve My Credit If I Pay Off Collections?

Collection notations within your credit report indicate that, at some point in the past, you stopped making payments on a debt. Collection accounts are always harmful to your credit score. Paying off collection accounts demonstrates responsible financial behavior, but it does not positively impact your credit.

Credit Score

Various credit scoring formulas, such as FICO and VantageScore, exist to help lenders determine your nonpayment risk when you apply for a new loan or credit card. Although the credit scoring formulas differ, they all use the data your credit report contains to arrive at your credit score. Collection accounts fall under the category of "derogatory debts." Thus, these accounts negatively influence your score regardless of whether you still owe the debt or have long since paid it off. Paying off a collection account does not improve your credit.

Payment Effects

When you pay off your collection account, the collection agency updates its report to the credit bureaus. The notation on your credit file notes that you paid off your debt. While collection accounts are always derogatory, lenders prefer to see paid rather than unpaid collection accounts within your credit history. By paying off the collection account, you reduce your overall debt load -- lowering the risk you present to lenders.

Improving Credit

Paying a collection account in itself does not improve your credit. If, however, you can negotiate with the collection agency to delete the damaging notation within your credit history in exchange for payment, your credit rating will improve. If the collection agency refuses to delete the derogatory credit record, the credit bureaus, in adherence with the Fair Credit Reporting Act (FCRA), will delete it seven years and 180 days from the date you first defaulted on the original debt. Deletion occurs regardless of whether you pay off the debt.

Avoiding Further Damage

Paying a collection account can help you avoid further damage to your credit report. Should you leave the debt unpaid, the collection agency can file suit against you for the delinquent balance. If the company wins its case in court, a public record of the lawsuit, known as a "judgment" appears within your file. Like collection accounts, judgments are negative notations that adversely affect your credit scores. Unlike collection accounts, however, the FCRA states that judgments can remain on file for 10 years or longer, depending on your state's laws. Thus, while paying off the debt does not in itself improve your credit, it can help you preserve your current credit rating.