How to Pay Off Collections to Raise Your Credit Score

A woman is holding up her credit card and paying bills.
Image Credit: Jupiterimages/Stockbyte/Getty Images

Paying off collections accounts don't always help your credit score. In fact, in the short term, doing so can cause it to drop by moving the account to the front of the credit line. To boost your score, negotiate the reporting status on the account with the collection agency before you send in the funds, and check your credit report afterward to confirm the creditor followed through.

The Payoff Paradox

Part of what goes into your credit score is how recent an account's activity has taken place. If you haven't paid an account in a year, it still serves as a drag on your score but doesn't weigh as heavily as how you're paying your bills now. When you pay off an old account, the last activity date resets to when you made the payment, meaning the delinquency shows up as current. As a result, while paying off the obligation helps your credit score in the long term by reducing your debt and amount of delinquencies, the immediate impact may be negative.

Show Them the Money

Creditors don't report negative information because they dislike you, nor will they change their reporting simply because you ask nicely. You have to be willing to give them what they want, which is the money you owe. The more money you have available, the better. If you can settle your balance with a lump sum payment, your chances of negotiating a favorable deal on how your account is reported improve. Creditors are less likely to make deals to change your credit report as part of a settlement or installment agreement, though it never hurts to ask.

Negotiate Before Paying

Tell creditors you have limited funds you're looking to spend in a way that improves your financial situation the most, and in particular you want to improve your credit report. Note that you have other creditors and can send the money elsewhere to a more cooperative creditor if needed. Say you're willing to pay your balance, but you want them to alter their reporting of your debt in exchange.

The Bankruptcy Threat

If your debts are mounting high enough that bankruptcy is a serious risk, mention that as well. Creditors holding unsecured debt often lose out in bankruptcy filings, which incentivize them to make a deal. Say you may be forced to file for bankruptcy but can avoid it if you can come to a satisfactory agreement with creditors, and you may get them to agree to your terms.

Stricken From the Record

A collection agency generally will be more willing to mark your account "Paid as Agreed" as a condition of your account settlement -- but there's a catch, it won't do much to boost your credit score anyway. It's the existence of the collection account that's the negative, not the wording on how the debt has been paid. To help your credit rating, you'll need to ask them to delete the entry entirely. Some will agree to those conditions, particularly if you can pay your entire amount due in a lump sum. Get any agreement in writing and check your credit report afterward to make sure it was done.