Does paying off debt in collections improve credit scores?

When debt payments are overdue, the creditor may try to collect the debt itself or send the account to a debt collector. This is sometimes referred to as sending the 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 can hurt credit scores.

Paying off a collection account may help boost scores. But it depends on several factors, including the credit scoring model. Learn more about how having debt in collections may affect credit scores and when paying off collection accounts may improve them.

What you’ll learn:

• 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.

• Some credit scoring models, including FICO® Score 9, FICO Score 10, VantageScore® 3.0 and VantageScore 4.0, penalize unpaid collection accounts. Paying off collection accounts may help improve these scores.

• The Consumer Financial Protection Bureau (CFPB) recommends verifying that the debt in collection is yours, negotiating a repayment 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 may change how it impacts your scores.

And according to Equifax®, one of the three major credit bureaus, 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.

Medical collection debt is treated differently than other types of collection debt. The following types of medical collection debt aren’t 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. 

There isn’t a universal answer to how paying off collection accounts will impact your scores. Different credit scoring models 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. According to Experian®, another of the three major credit bureaus, paying off collection accounts may help improve your scores for these credit scoring models:

• FICO Score 9

• FICO Score 10

• VantageScore 3.0 

• VantageScore 4.0

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 warns that if you ignore a debt collector, it may file a lawsuit against you. Having unpaid debt in collections can also negatively impact your credit scores. And this may make it more difficult to get approved for new credit. Plus, debt in collections may accrue interest and other fees. So regardless of whether it improves your credit scores, paying off collection accounts can be a smart financial decision.

The CFPB recommends taking these steps to pay off collections 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.

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 negotiate 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. 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.

You can get a free copy of your credit report from each of the three major credit bureaus by visiting AnnualCreditReport.com.

CreditWise from CapitalOne is another way to keep an eye on your credit. With CreditWise, you can access your credit report and credit score without hurting your scores. And with the CreditWise Credit Score 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.

Paying off collection accounts can have a lot of benefits, including potentially improving some of your credit scores. But remember, you have multiple credit scores and paying off collections accounts may not impact them all the same. 

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