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Will Paying Off a Collection Remove it From My Credit Report?

Last Updated: June 24, 2010

For the last six months or so, you were unable to make your credit card payments and now the account is past due. You no longer are getting calls from the original creditor because they have turned your account over to a collection agency to harass you.

Now you want to buy a house and you have pulled your credit report. This account may appear twice - first as a "charge off" by the original creditor and then "in collections" by the collection agency. Will simply paying the due amount to the collection agency remove this blemish from your report?

Unfortunately, the answer is no. If you are unable to negotiate the way the account will appear on your credit report, what will happen is that the debt will appear on your credit report as "Paid" or "Paid Collection". This will help your credit score only marginally, but having this collection paid is definitely better than unpaid.

Delinquencies, Charge-offs and Collections All Seriously Hurt Your Score

Not paying your bills is bad when it comes to your credit score. Here are some important things to know:

• When it comes to your FICO credit score, what matters most is what the "original creditor" says on your credit report. The status and amounts owed shown on that account will weigh more heavily in your credit score than what a collection agency reports.
  
• If the original creditor shows a "charge-off" with a balance still owed, you might be able to boost your score by paying off the bill and getting the original creditor to reset the balance to zero.
• "Settling" with the original creditor on an old debt can hurt your score. If you settle for less than you originally owed, the account will noted "settled" and this can be worse than just leaving it open and unpaid. Settling with a collection agency may or may not affect your score.

Back to the original dilema, you want to buy a house. A mortgage lender may require that you pay off or settle any open collections that show up on your credit report as a condition of getting the loan. If you're interested in a settlement, push to have the creditor or collection agency either stop reporting the account altogether or demand that the account be reported as "paid in full" rather than "settled." Such treatment might not help your score, but it's less likely to hurt it.

Alternatives to Paying Off the Debts

Now, let's say you are not in the market to purchase a home and you are just trying to figure out what to do with these old debts. Once a negative item appears in your file, it will stay reporting for 7-1/2 years from the time you stopped paying on that account. So if you have time, you can as they say "let sleeping dogs lie" and just let these old charge-offs naturally fall off your report. Your score may or may not increase but at least this negative will no longer appear on your report.

But of course, FICO is always changing how they view old debts and how they will effect your score. Before you pay off that old and moldy collection, make sure to get all the facts so your payment will be a benefit to you - in the form of a higher credit score.