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Does Paying a Debt Collector Help Your Credit?
by
JG Wentworth
•
November 13, 2024
•
7 min
The relationship between debt collection payments and credit scores is more complex than many consumers realize. While paying off collection accounts can indeed impact your credit, the extent and nature of this impact varies significantly based on multiple factors, timing, and the specific approaches taken.
Let’s break it all down so you can have a better understanding of how credit scores work…
The complex world of collections and credit scores
When an account goes to collections, it triggers a series of events that can devastate your credit score. The damage begins before the collection account even appears on your credit report, as the original creditor likely reported several months of late payments before transferring or selling the debt to a collection agency. By the time the collection account appears, your credit score may have already dropped by 100 points or more.
The initial damage from a collection account is significant, but it’s the long-term implications that often surprise consumers. Many people believe that paying off a collection account will immediately restore their credit score to its previous level. Unfortunately, this assumption doesn’t align with how most credit scoring models work.
The treatment of paid collections varies significantly depending on which credit scoring model potential creditors use to evaluate your creditworthiness.
How collections affect credit scores
When an account goes to collections, several credit-damaging events typically occur:
- The original creditor likely reported multiple late payments.
- The account may be marked as charged-off.
- A new collection account appears on your credit report.
- Your credit score typically drops by 100+ points.
This negative domino effect creates a complex situation that simple payment may not fully resolve.
Credit scoring models and collections
To complicate matters, different credit scoring models treat paid collections differently:
FICO 8 (Most commonly used)
- Paid collections still impact your score negatively.
- All collections under $100 are ignored.
- Treats paid and unpaid collections similarly.
FICO 9
- Ignores paid collection accounts.
- Weighs unpaid medical collections less heavily.
- More forgiving of paid collections than FICO 8.
VantageScore 3.0 and 4.0
- Ignores paid collections.
- Treats medical collections more leniently.
- Responds more positively to collection payments.
The overall timeline
Once a debt has been paid off, you can generally expect your score to be impacted accordingly:
- Strongest negative impact in first 2 years.
- Moderate impact years 3-5.
- Minimal impact years 6-7.
Understanding short and long-term effects
Immediate impact: Once a debt is paid off, the account’s status updates to “paid” or “settled,” and the balance shows as zero. However, the effect on your credit score isn’t as straightforward. In the short term, you might see little to no improvement in your FICO 8 score, while newer scoring models might reflect a more immediate positive change.
The long-term picture: This is where paying collections becomes more clearly beneficial. All collection accounts, whether paid or unpaid, can remain on your credit report for seven years from the date of first delinquency with the original creditor. However, the negative impact of these accounts diminishes over time, and paid collections generally look better to potential creditors than unpaid ones, even if the numerical credit score doesn’t reflect this difference.
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Strategic approaches to paying collections
The method you choose to resolve a collection account can significantly impact your credit recovery journey.
- Pay for delete agreement: One increasingly popular approach is the “pay for delete” agreement, where consumers negotiate with collection agencies to remove the collection entry from credit reports in exchange for payment. While this approach can be highly effective when successful, it’s important to understand that collection agencies are not obligated to agree to such arrangements, and even when they do, the agreements must be carefully documented and monitored for compliance.
- Debt settlement: Allows consumers to resolve their collection accounts for less than the full amount owed. While this approach can provide immediate financial relief, it comes with its own set of considerations. Settlement agreements typically result in the account being marked as “settled” rather than “paid in full,” which some future creditors might view less favorably. Additionally, the forgiven amount may be reported as taxable income, creating potential tax obligations.
- Payment plans: Offer a more gradual approach to resolving collection accounts. While these arrangements might take longer to complete, they can make the payment process more manageable for consumers working with limited financial resources. However, the extended timeline means the collection account continues to impact your credit throughout the payment period, though some newer scoring models may begin to view the account more favorably once regular payments are established.
The Path to credit recovery
Regardless of how you choose to resolve a collection account, the path to credit recovery requires a comprehensive approach.
- Documentation: The process begins with thorough documentation of all interactions with collection agencies, including validation requests, negotiation attempts, and payment agreements. This documentation proves invaluable if questions arise about the resolution of the debt or if the collection agency fails to update credit reports accurately.
- Rebuilding positive credit: After resolving collection accounts, rebuilding positive credit history becomes crucial. This process typically involves establishing new credit accounts, maintaining perfect payment history, and keeping credit utilization low. Many consumers find success with secured credit cards or credit-builder loans, which provide opportunities to demonstrate
Special considerations in collection payments
- Medical collections: These warrant special attention in credit recovery strategies. Recent changes in credit reporting policies have created more favorable treatment for medical debt, including a 180-day waiting period before reporting and the removal of paid medical collections from credit reports. These changes reflect a growing recognition that medical debt often results from circumstances beyond consumers’ control and shouldn’t carry the same stigma as other types of collections.
- Managing multiple collection accounts: This requires careful strategic planning. While conventional wisdom might suggest paying the largest or newest collections first, the optimal approach depends on various factors, including the age of the debts, the likelihood of legal action, and the willingness of different collectors to negotiate favorable terms. Success often comes from developing a comprehensive plan that addresses all collections while preventing any single account from creating additional problems through legal action or aggressive collection tactics.
The bottom line
While paying collection accounts might not provide the immediate credit score improvement many consumers hope for, it remains an essential step in long-term financial health. As credit scoring models continue to evolve, the treatment of paid collections may become increasingly favorable, particularly as more lenders adopt newer scoring models that ignore paid collections entirely.
The key to success lies in understanding that credit recovery is a marathon, not a sprint. Paying collections represents just one component of a broader strategy that should include building positive credit history, maintaining responsible financial habits, and regularly monitoring credit reports for accuracy. With patience and persistence, you can overcome the impact of collection accounts and establish a strong foundation for future financial success.
The bottom line
The journey to becoming debt-free requires patience, discipline, and a solid strategy. While the path might seem daunting, having a clear plan for which debts to prioritize makes the process more manageable and increases your chances of success.
Choose the strategy that best fits your situation and personality, but remember that the most important factor is consistency. Small, regular progress will eventually lead to significant results, and the financial freedom that comes with being debt-free is worth the effort.
There’s always JG Wentworth…
Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 48-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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