Will Paying a Collection Account Improve my Credit Score?

January 11, 2009

How do collection accounts affect my credit report and credit score?

The company with whom you originally had an account is called an “original creditor.”

Once the original creditor gives up on trying to collect on an account, it will charge off the account and may assign or sell the account to a debt collector.

Once the account has been sold or transferred to a debt collector, there may be two entries on your credit report.

One entry will be from the original creditor. It will usually show that the account has been “charged off.”

The debt collector may make a separate entry on your credit report. Both of these entries can harm your credit report and your credit score.

Will paying the debt collector improve my credit score?

Simply paying a debt collector may not help your credit score.

This is partly because of the double reporting problem described above, and partly because of the scoring model that is used to calculate your credit score.

Even if you pay a debt collector, the original creditor’s negative item will still appear on your credit report.

And, a debt collector may not delete its entry on your credit report after you pay. It may simply notify the credit bureaus to report the account as a “paid collection.”

But, the credit scoring models are designed to penalize consumers for any collection account appearing on their credit report– even if the account is a “paid collection.”

But, there may be other reasons to pay a collection account.

Even though paying the collection account may not help your credit score, there may be other reasons to pay and / or settle the account.

Avoid a debt collection lawsuit. These days, more creditors and debt collectors are suing consumers to collect on old debt.

You plan to make a large purchase. Most mortgage companies and some car financing companies will require you to pay any collection accounts before they will give you a loan.

You are looking for a job or applying for a security clearance. Many employers do a credit check before offering applicants a job. Many employers will see unpaid collection accounts as a red flag. And, it would be very difficult to get any kind or security clearance if you have outstanding collection accounts on your credit report.

Negotiate Improved Credit Reporting.

For the reasons discussed above, it is very important to negotiate the best possible credit reporting when paying any accounts.

Many times (though not always), the best possible outcome is a deletion of the debt collector’s entry (also called a “tradeline”) from your credit report.

But, be sure to negotiate improved credit reporting before making payment. After you have paid off the account, the creditor or debt collector has no incentive to change its reporting of the tradeline.

And, as always, get everything in writing.