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In this article:
- What Are Collection Accounts?
- How Do Collections Affect Your Credit?
- Will Your Credit Score Improve if You Pay Off All of Your Collections?
- Can You Remove Paid Collections From Your Credit Report?
- How to Improve Your Credit Scores After Collections
It's possible that paying off a collection account will increase your credit score, but that largely depends on the version of the software used to calculate the score.
Here's what you need to know about how paying off collections could impact your credit.
What Are Collection Accounts?
A collection account is an entry on your credit report that signifies an unpaid debt in default (more than 90 days past due) that your creditor has turned over to an in-house collection department or a third-party debt collection agency.
Accounts in collections appear on your credit report and can have serious repercussions for your credit scores. It's usually not necessary to check your credit report to find out if an account is in collections because collection agents are very proactive and persistent in their efforts to get payment. They'll typically hound you by phone, mail or email, pressing you to pay up.
Paying is often a good idea, not only because you presumably owe the debt they're seeking or even because it will get the bill collectors off your back. There's a chance, if no guarantee, that paying off an account in collections could benefit your credit score.
How Do Collections Affect Your Credit?
Collections fall under payment history, the biggest factor in your FICO® Score☉ calculation, responsible for about 35% of your score. Consumers with collections on their credit reports may have lower credit scores than consumers who have no collections.
Historically, a collection account for an amount greater than $100, whether paid or unpaid, would have an impact on your credit score for up to seven years from the first missed payment that led to the account being turned over to collections.
The impact of collections on credit scores has shifted in recent years, however, and depends in part on the nature of the debt and the version of the credit scoring model a lender uses. Here are some of the factors that influence the effect of collections on scores:
- The national consumer credit bureaus (Experian, TransUnion and Equifax) no longer list paid medical collections or unpaid collections for medical debts of less than $500 on your credit reports, so they cannot affect any credit score in any way.
- FICO® Scores 9 and 10, the most recently introduced versions of the FICO® Score, ignore all paid collections and reduce scores less when an unpaid collection is for a medical bill than when it's for another type of debt. FICO® Score 8, the most widely used version, does not make this distinction, and it lowers scores if a collection account for a debt of $100 or more appears on your credit report, whether it's paid or unpaid.
- VantageScore® 3.0 and 4.0, the most recent versions of scoring software from the national credit bureaus' joint score-development venture, ignore all paid collections and all medical collections, whether paid or unpaid. As a result, those accounts will not affect your VantageScore. Unpaid non-medical collections accounts can hurt your VantageScores, however.
Will Your Credit Score Improve if You Pay Off All of Your Collections?
Depending on the nature of the collection account and the model used to calculate your score, paying off a collection account could cause your score to increase—or it could have no effect at all on your score.
Paying off collection accounts can raise credit scores calculated using FICO® Score 9 and 10 and VantageScore 3.0 and 4.0, but it won't have any effect on scores produced by older FICO scoring models.
That includes the many lenders who use FICO® Score 8 and, at least for now, issuers of mortgages known as conforming loans, which meet requirements for purchase by Fannie Mae and Freddie Mac. These government-sponsored enterprises, which purchase the majority of U.S. mortgage loans from the lenders that issue them, currently require lenders to report applicants' credit scores using "classic FICO" models that predate FICO® Score 8. All that will soon change, however.
In 2022, the Federal Housing Finance Agency (FHFA)—the regulator that sets lending guidelines for Fannie Mae and Freddie Mac—announced that lenders issuing conforming loans must use FICO® Score 10 T and VantageScore 4.0 to evaluate mortgage applicants. (FICO® Score 10 T is a variant of FICO® Score 10 that, like VantageScore 4.0, can use more nuanced "trended data" compiled at the national bureaus.)
The conversion to the new credit scoring requirements is scheduled to be completed by the end of 2025. Among the many implications of the change is the potential for paid collections to help credit scores in the mortgage application review process.
Can You Remove Paid Collections From Your Credit Report?
No, you can't remove paid collections from your credit report. If an account is misreported as being in collections, you have the right to dispute it with the bureau that supplied the report. But if it's legit (and you presumably wouldn't have paid it if it weren't), a paid collection account won't come off your credit report until its expiration date—seven years from the first missed payment that led to the account being turned over to collections.
How to Improve Your Credit Scores After Collections
The question of whether paying off collections will or won't increase your credit scores largely depends on the credit scoring software used to evaluate your credit applications, but these tried and true techniques can help increase your credit scores no matter what scoring system is used:
- Pay your bills on time, all the time. The key to long-term credit score improvement is preventing new negative entries from appearing on your credit reports. That means making every debt payment on time, every month. By establishing a budget that covers your bills and using autopayments, calendar alarms or any other tools that work for you, you can avoid late payments. Do this, and you won't have to worry about collection accounts or debt collectors.
- Keep credit card debt to a minimum. Ensuring that your credit card debt is as low as possible is another great way to improve your credit scores. Credit scoring models consider your credit utilization ratio, or credit card balances as a percentage of their credit limits, when calculating your scores. Low balances mean low utilization ratios, which could improve credit scores.
- Don't apply for credit unless you need it. Each time you apply for new credit, the lender will likely pull one, if not more, of your credit reports. This will result in a hard inquiry on your reports, which can lower your scores temporarily. And while inquiries are one of the least influential factors in your credit scores, they can still be a red flag to lenders.
The Bottom Line
Paying off collection accounts could improve your credit scores, but there's no guarantee since you can't know which credit scoring model a lender will use to process your credit application. As newer credit scoring models gain traction—a process that can only accelerate as mortgage lenders complete their adoption of FICO® Score 10 T and VantageScore 4.0—the benefits of paying off collection accounts are likely to become more widespread.
If collection accounts have hurt your credit, or if you're just looking for ways to improve your credit scores, consider using Experian Boost®ø to add recurring bill payments to your Experian credit report.
