In the race to achieve good credit, many people often ask if paying off bills that have gone to collections will improve their credit score. Some people believe it will, while others claim that it won't. So, what's the correct answer?
Contrary to popular belief, paying off a collection account won't do anything to improve your credit score. Since any negative marks on your credit report can stay there for seven years, your rating won't improve based solely on paying off collections.
So with that said, should you even pay off your collection accounts, or is it better to wait? And is it possible to have a good credit rating when you have accounts in collection? Let's explore these questions and more to see what you can do to improve your credit score.
What Are Collections?
Collections are debts that you owe that have been labeled as being unpaid. Collections are usually the result of unpaid bills or accounts that have gone into collections. This means that the original creditor has turned your account over to a company that specializes in retrieving unpaid debts.
When this happens, the collections company usually buys the unpaid accounts from the original creditor in bulk amounts. For example, let's say you forgot to pay your last payment to the electric company before you moved to a different state.
The electric company tried to collect the payment from you but was unsuccessful. After a set period of time with no success, your account goes into a queue designated for collections. The collection company then comes along and offers to buy all of the unpaid accounts in the electric company's designated queue for a discounted sum.
With the electric company satisfied, the unpaid debt becomes the responsibility of the collection agency. This is why collections companies are often unceasing in their attempts to collect debts—they want to make sure they get paid for the debt they purchased.
But it's also why they can afford to settle with debtors at costs far below the original debt. They themselves only paid a fraction of the cost of the original debt. So they can afford to collect your debt at a discounted price.
It's important to note that collections can be damaging to your credit report and are often reported to three major credit bureaus. So while you may have gotten the electric company (in this case) off your back, you'll still pay with your credit rating.
How Many Points Will My Credit Score Increase When I Pay Off Collections?
Have you ever wondered what happens to your credit score when you pay off collections? There are many factors that can affect your credit score, but collections are some of the most important. When you have an account turned over to collections, your credit score can drop by as much as 110 points.
So once your account goes to collections, it will be reported to the credit bureaus, which will then update your credit report accordingly. But what happens if you pay the collections agency and eliminate your debt? How many points does your score increase by?
Unfortunately, zero. It is important to know that paying off collections does not get rid of the damage to your credit rating. This also means that collections will still be included in your credit score and will negatively affect your credit score. Collections will remain on your credit report for seven years, and each collection can significantly impact your credit score.
Therefore, paying off collections does not erase the fact that you owed the debt in the first place. It also does not erase the damage that the collections account will do to your credit score.
In order to avoid having bad credit, it is important to pay off your debt in a timely manner before it becomes a collections account on your credit report.
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Is It Better to Pay Off Collections or Wait?
Since paying off collections accounts does nothing for your credit score, should you even pay them? In short, if you have the funds, paying off your debts is the best option. Collectors will not let the debts go away. And they can be mighty persistent in trying to collect them. But before you pay any debts, verify that the collectors and your debts are legitimate. Ask the collection agency to provide written validation of your debt.
As a debtor, it's important that you know about the Fair Debt Collection Practices Act. This act gives you certain protections from collectors. Therefore, it is important to keep track of all communications with collectors by making a note of them when they occur. The law requires that the collection agency verify your debt within thirty days.
Moreover, the letter must contain information about the original debt. This verification must be provided by the collector. What's more, they cannot legally collect the debt or report it to credit bureaus if they don't.
But what if the debt is accurate? You should then plan your repayment strategy if they validate your debt. Remember, collections agencies will often let you settle your debt for a much lower amount than the original bill.
So if you're offered a settlement, accepting a collector's offer to settle at a lower amount is a good idea. Just ensure that you get it in writing. Also, make sure that the offer clearly states that they will remove the collection account from credit reports once the debt has been settled.
Moreover, you can also ask collectors to give you a "pay for delete" option when you pay off your debt. This option can help boost your credit score. Please note, though, that most collection agencies aren't inclined to agree to this, and most won't offer it. That said, it doesn't hurt to ask.
Finally, try to negotiate with your collectors to have your debts reported as "paid in full." This is better than the collection agency reporting as a settlement. If the collector offers the option for you to pay a portion of the debt, it should not negatively affect your credit score.
Learn More: Does Your Credit Score Update? How Often?
Can You Have a 700 Credit Score with Collections?
Absolutely. While you might have a collections account on your credit report, it doesn't mean you can't build your credit score. Many lenders are willing to give you a loan with a collections account since they are more interested in the types of debt you currently have.
A credit score is usually considered good if it's between 700 and 719. Anything above 720 is generally considered excellent. A bad credit score is anything below 580. So with that said, you want to keep your score around the 700 mark. But you're probably wondering if that's possible when you have accounts in collections.
The truth of the matter is that it's certainly possible to have a credit score of 700 with accounts in collections. And you can continue to work on your credit rating to help bring the score up. But you want to be especially careful not to let anything else go to collections.
Because if you currently have a credit rating of 700 with collections on your report, another collections mark would most certainly reduce your score, thus putting you right back at square one.
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How to Improve Your Credit Score
There are lots of ways to increase your credit score. One way is to pay your bills on time, every time. You can also get a secured card and put some money down for the deposit. Secured cards are not risky for lenders because they know that if you default on the card, they will get their money back out of the security deposit.
If you can open a new line of credit, you can start working on improving your credit rating. But again, you must make sure that you pay your credit in full every month. Letting it slip will promptly lead to trouble for your credit standing.
Moreover, you should continually work towards paying off your debt. The last thing you want is for debt to be turned over to collections. Also, be sure to review your credit report on a regular basis.
Errors and mistakes on your credit report can lower your credit score and make it difficult to achieve the best rates and loans. If you notice any errors, contact the credit bureaus and work on getting the errors rectified.
Your credit rating is an essential component of life that dictates what you can buy. Therefore, it's important to do all that you can to keep it in good standing. Accounts that have been turned over to collections can significantly lower your credit score. If that has happened to you, contact the collections agency and see if they will remove the mark on your credit score upon receiving payment.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.