Does paying off collections improve your credit score?

When debt payments are overdue, the creditor may send the account to a debt collector. This is sometimes called sending debt to collections or having debt in a collection account. Collection accounts may stay on credit reports for up to seven years. And having debt in collections may hurt your credit scores. 

But what happens if you pay off a collection account? Will it improve your credit scores? Learn more about how having debt in collections may affect credit scores and when paying off collection accounts may improve them.

Key takeaways

• Payment history is a major part of many credit scoring models. Having debt in collections shows a history of late or missed payments and may harm credit scores.
• For some credit scoring models, paying off collection accounts may improve credit scores.
• FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0 credit scoring models penalize unpaid collection accounts. Paying off collection accounts may help improve these scores. 
• When it comes to paying off collection accounts, the Consumer Financial Protection Bureau (CFPB) recommends verifying that the debt is yours, figuring out a reasonable repayment plan, negotiating a plan with the debt collector and getting the agreement in writing. 

Collection accounts, and the late or missed payments that lead to them, may lower your credit scores. In fact, for some credit scoring models, payment history is the most significant factor that impacts scores. Payment history accounts for 40% of VantageScore 3.0 credit scores and 41% of VantageScore 4.0 scores. FICO says that payment history makes up 35% of its credit scores. 

Collection accounts and other derogatory marks may stay on your credit reports for up to seven years. However, whether a collection account is paid or unpaid can change how it affects your scores.

For recent versions of the FICO and VantageScore credit scoring models, paying off a collection account may help improve your scores. According to Experian®, one of the three major credit bureaus, that’s because these credit scoring models only penalize unpaid collection accounts. 

And according to Equifax®, another major credit bureau, some credit scoring models might disregard collection accounts where the original debt was a small amount. But keep in mind that small debts can grow over time from things like interest charges and fees. So it’s still a good idea to pay them off as soon as possible.

Medical collection debt is treated differently than other types of collection debt. These types of medical collection debt are not allowed to show up on credit reports:

• Paid medical debt
• Medical collection debt under $500
• Medical collection debt less than a year old

Because these kinds of medical collection debt don’t show up on your credit reports, they typically won’t affect your credit scores either. The CFPB says that if you find any of these items on your credit reports, you should dispute them immediately. If you can’t pay your medical bills, there are financial assistance programs that may be able to help.

There isn’t a universal answer to how paying off collection accounts will impact your scores. There are many different types of credit scoring models. And each one may use different information and methods to calculate scores. 

Some credit scoring models may treat paid and unpaid collection accounts the same. Others may only penalize unpaid collection accounts. This is the case for FICO Score 9, FICO Score 10, VantageScore 3.0 and VantageScore 4.0 credit scores, according to Experian. For these credit scoring models, paying off collection accounts may help improve your scores.

Remember, debt in collections may also accrue interest and other fees. So regardless of whether it improves your credit scores, paying off collection accounts can be a smart financial decision.

Credit scoring models are complex. Whether your score will change, and by how much, depends on the type of credit scoring model and the credit report information it uses. If paying off a collection account does boost a credit score, there’s no guarantee that it’ll increase by a certain number of points. 

The CFPB recommends taking these steps when paying off collection debt: 

1. Make sure the debt is yours. By law, debt collectors have to give the debtor certain information about the debt in question. Generally, you should get this in writing within five days of the collector first contacting you. The CFPB recommends using this information to confirm that the debt belongs to you and that the amount owed is correct. You can also ask the debt collector for more details if you need them.
2. Figure out a repayment plan. Take a look at your monthly budget and think through a realistic plan for paying off the debt. The U.S. Department of Justice has a list of approved credit counseling agencies that may be able to help. The CFPB warns against neglecting other bills to pay off collection debt, as this could cause more problems down the road. And it also says that it can be risky to use a debt settlement company. 
3. Negotiate with the debt collector. Contact the debt collector and work out a debt repayment or settlement plan. You can do this yourself or through an attorney or credit counselor. Once all parties agree on a plan, make sure to get the agreement in writing.

Improving your credit scores requires responsible credit use over time. Here are a few ways to start rebuilding your credit after having debt in collections: 

Finding out you have debt in collections can be a wake-up call that it’s time to get serious about debt repayment. It’s worth taking a comprehensive look at all your debt and making a plan to pay it off. 

You may want to explore different debt repayment strategies, like the debt avalanche method, the debt snowball method and debt consolidation, to help you get started. There are credit counseling services that can help too. 

Here are a few parts of using credit responsibly, according to the CFPB:

• Always pay your bills on time. 
• Keep your credit utilization ratio below 30%.
• Limit hard inquiries and only apply for the credit you need. 

Regularly monitoring your credit is another important part of using credit responsibly. It can help you keep track of your progress, learn how financial decisions affect your credit and find any errors that may be impacting your scores.

If you think you’ve spotted an error on your credit report, the CFPB recommends disputing it right away. It’s also a good idea to check your other credit reports to find out whether they contain the same error. You can get a free copy of your credit report from each of the three major credit bureaus. Visit AnnualCreditReport.com to learn more.

CreditWise from CapitalOne is another way to keep an eye on your credit. With CreditWise, you can access your TransUnion® credit report and VantageScore 3.0 credit score without hurting your scores. And with the CreditWise Simulator, you can even explore the potential impact of financial decisions before you make them. CreditWise is free for everyone, whether you’re a Capital One customer or not.

Collection accounts may affect your credit scores and may stay on your credit reports for up to seven years. Paying off collection accounts can have a lot of benefits, including potentially improving some of your credit scores.

If you want to learn more about managing debt, check out these three strategies for paying off debt.