Will Paying Off a Collection Account Improve a FICO Score?

Paying off most varieties of debt demonstrates financial responsibility and, as such, benefits your FICO credit score. The credit scoring system treats paid collection accounts differently than debts you still owe to the original creditor. Thus, paying off a collection account may make you appear more financially stable but does not raise your FICO score.

How It Works

The FICO scoring formula is a credit scoring system originally developed by the Fair Isaac Corporation. FICO takes considers a multitude of factors when determining an individual's credit score--including how much he owes his creditors. By paying off a debt, you reduce your outstanding debt level and increase your credit rating.

Collection accounts, however, are inherently negative entries. The very presence of a collection account signifies that you defaulted on your agreement with a previous creditor. As long as the notation remains in your credit history, you suffer the derogatory effects. Paying off the debt does not have a positive impact on your credit.

Paying Collections

Although paying a collection account does not improve your FICO score, it demonstrates to lenders that you were willing to satisfy your debts as soon as you were financially capable of doing so.

Once you pay off the collection account, your credit report will reflect a "paid" versus "unpaid" collection. While lenders do not want to see any collection accounts on an applicant's credit file, paid collections are better than unpaid ones.

Paid Deletion

The only way to improve your credit rating by paying a collection account is to negotiate with the collection agency to remove the listing in its entirety instead of merely updating its status as paid. Because it is the collection account itself, rather than its unpaid status, that negatively impacts your FICO score, removing the entry boosts your credit rating. Not all collection agencies will agree to modify your credit history in exchange for payment.

Time Frame

Regardless of whether you pay a defaulted debt or leave it unpaid, the credit bureaus must remove any resulting collection accounts seven years from the date the original creditor reported the debt as 180 days overdue. Should you notice a collection account older than seven years on your credit report, the Fair Credit Reporting Act allows you to dispute the debt with each credit bureau as obsolete and request that the credit bureaus immediately remove the account from your credit history. Once the credit bureaus remove the account, your FICO score will improve--whether you paid the debt or not.