Does Paying a Collection Improve Your Credit Scores?

Working to restore damaged credit scores is a little bit like solving a puzzle. People often look at their credit reports to find out what information is causing their poor scores. Then, they work backward to address those issues.

However, the credit improvement process isn’t always so simple or straightforward. For example, there are times when paying a collection account might improve your credit scores, but in other instances, it will not. So, if you’re wondering “does paying a collection improve your credit scores?”, the answer is…maybe, but maybe not.

What is a collection account?

A collection account or, formally, a collection “segment” as it’s properly called when it’s appearing on your credit reports, is a type of derogatory credit entry. It occurs when you default on a debt and the original creditor assigns or sells your debt to a third party. This third party is commonly referred to as a collection agency. Collection agencies furnish collection accounts to the credit bureaus.

Credit scoring models like FICO view collection accounts as negative events. Therefore, when a new collection shows up on your credit report, it has the potential to damage your credit scores. Collections are allowed to remain on your credit reports for up to 7 years from the date of the first delinquency with the original creditor, whomever that may have been.

Will paying or settling a collection account improve your credit scores?

You can pay a collection account in full or collection agencies may be willing to accept a settlement amount that is less than what you owe to satisfy the debt in full. Either way, you will end up with a zero balance on your credit report. (Tip: Be sure to get any settlement offers in writing before you pay a collection agency.)

This is important because all unpaid collections are considered or “count” in credit scoring systems. But, a collection that has a zero balance is where the fun and complexity begins. Whether paying or settling the collection improves your scores turns on the generation of the FICO credit scoring system that a lender decides to use.

Older credit scoring systems

With older credit scoring systems, such as those mortgage lenders use when you want to buy a home, paying or settling a collection account won’t improve your credit scores. The balance of a collection account isn’t a factor in the older credit scoring models. Instead, it’s the mere existence of the collection account (regardless of its balance) that affects your credit score.

An older credit scoring system might look at two collection accounts with different balances and score them the same, all other things being equal. So, a $0 balance collection account and a $1,000 collection account would cause similar credit score damage, depending on when the items appeared on your credit reports and other factors like their age.

You can thank the FHFA for this. The same credit scoring models have been used because of their mandate for over 20 years. If you think that doesn’t make any sense, you’re not alone. There’s an entire credit industry that agrees with you.

Newer credit scoring systems

Ok, here’s where the good news starts. The story changes a bit when newer credit scoring systems are involved. Contemporary credit scoring systems, as in the ones not used by mortgage lenders, ignore paid collection accounts, and some ignore lower dollar collections even if unpaid. And, even better news, collections that have been caused by medical debt will be removed entirely once they have been paid or settled.

As a result, paying or settling a collection account has the potential to help your credit score. But a lender must use a newer scoring system for this scenario to apply. For context, “newer” doesn’t mean brand-new. FICO 9 and FICO 8 have been around for 7 and 13 years, respectively.

Should you pay or settle collection accounts?

Yes, yes, and yes. If you owe a legitimate debt that you agreed to pay, you should repay it if at all possible. Except for the medical debt scenario mentioned above, paying a collection account won’t remove it from your credit reports.

However, bringing collections to a zero balance can help stop stressful collection calls and letters, and it might also protect you from being sued by debt collectors. And as you can see above, paying or settling a collection also has the potential to improve your credit score in certain scenarios.