Bill's Answer:
Answered by
Mark Cappel
When considering whether to pay off a collection account as a way to improve your credit score, you must consider two factors.
First, look at the age of the debt. The older the date of the debt, the less impact it has on your credit score today. In the past, if you paid off an old debt, it would renew the date of recent activity and would actually create a negative impact on your credit rating. With time, your credit score would improve as a result of paying off the debt. But with the new scoring system by Fair Isaac & Co., paying off old debt does not hurt your credit score because the scoring system distinguishes between new payments and new delinquencies. You can read more about credit score at our credit score information page.
Your credit report will take approximately two months to show that the account was paid off. Under the FCRA, the negative collection activity can stay on your credit report for 7 years from when you stopped paying on the account, the "date of first delinquency."
Second, lenders do look at more than just your FICO score. Many lenders view paying off old debt as a sign of goodwill and credit worthiness by the borrower. Therefore, do not be overly focused on credit score because the lender will look beyond the number to see patterns of payments and commitment to financial obligations. A prospective lender likes to see a person who has paid back all their debts, even if it there were some bumps along the way.
Here are two links to FTC pages and another to a Bills.com article that will help you learn more about credit repair and credit scores:
- Your Rights: Credit Reporting (FTC)
- Credit Reports & Scoring (FTC)
- 7 Techniques to Improve Your Credit Score
If you would like more information or would like to hire the services of a credit repair professional, visit the Bills.com credit resource page.
I hope this information helps you Find. Learn & Save.
Best,
Bill
Erin D.
Toledo, OH | October 02, 2012
Toledo, OH | October 02, 2012
My credit score is 580, and I found out an old debt from over five years ago, totalling around $5000, is still showing up as being outstanding. I finally was able to get an official letter from the lawyer firm that garnished my wages until i paid what i had owed in-full. Who do i need to send this letter to, in order to raise my credit score, so that i can finally apply for a home loan??? Also, is my husband's bad credit going to affect me applying for the loan?
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Bills.com
October 02, 2012
October 02, 2012
Under the Fair Credit Reporting Act, derogatory accounts may appear may appear on your credit report for up to 7 years from the date of first delinquency. Take a look at one of your credit reports by accessing AnnualCreditReport.com and find the date of first delinquency on the account in question. Add 7 years to the date of first delinquency, and that is when the debt will fall off your credit report. Your credit score should show some improvement at that point, assuming you have been paying your other accounts on time.
If the account is showing a debt outstanding, and you paid the debt in full, then dispute the account with each of the consumer credit reporting agencies that report the incorrect account status.
Both spouses do not need to apply for a mortgage. If your income and credit are sufficient to qualify for a loan on your own, your husband's bad credit will not be a barrier. If you need his income to qualify, then it will be a problem. See the Bills.com resource Mortgage When a Spouse Has Bad Credit to learn more.
If the account is showing a debt outstanding, and you paid the debt in full, then dispute the account with each of the consumer credit reporting agencies that report the incorrect account status.
Both spouses do not need to apply for a mortgage. If your income and credit are sufficient to qualify for a loan on your own, your husband's bad credit will not be a barrier. If you need his income to qualify, then it will be a problem. See the Bills.com resource Mortgage When a Spouse Has Bad Credit to learn more.
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Heather S.
Lake Tapps, WA | July 27, 2012
Lake Tapps, WA | July 27, 2012
My credit score is 527. I have $6700 in collections. Most are unpaid medical bills, but $1800 of it is credit card debt (3 closed accounts). I would like to improve my credit score. In what order should I begin paying off this debt? Should I pay credit cards before medical bills, or age of accounts in general? Thank you.
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Bills.com
August 02, 2012
August 02, 2012
Paying off old, delinquent debts does not immediately greatly improve your credit score. The damage to your score that was done when the accounts become delinquent and then went into collections is not undone when the debts are paid. However, it is a positive factor to bring a debt to $0 balance. It does have a limited, good effect on your credit. More importantly, it eliminates the debt leading to a judgment that would further harm your credit and could be enforced by a wage garnishment or bank levy.
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Krystle A.
Shenango, PA | June 06, 2012
Shenango, PA | June 06, 2012
I am contacting collection agencys and trying to get letters as proof that i am settled the account. My score now is 521 and i have these accounts for 5 years now i have one care credit account and a car loan for 47k how much will my score improve when i settle all this old debt. I tryed negotiating money for delete but they said no 3 will post paid in full and 5 will state settled for less amount. I want to buy a house and need a 620 thanks
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Bills.com
June 12, 2012
June 12, 2012
See the Bills.com article Short Sale, Foreclosure & Your Credit Score to learn how long it takes a credit score to recover from certain negative events.
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Mary A.
Elkton, MD | April 06, 2012
Elkton, MD | April 06, 2012
My husband and I had a car repo'd Aug 10. The lender sold the car at auction and sent the balance to a collection agency. We are trying to clean up our credit now. We just got a new loan for a car. I contacted the lender from the repo'd car and they refer me to the collection agency. I called the number for them and it gives some error message and hangs up. I looked up the agency and got two different number for it 1 a toll free and the other a long distant...no biggie free long distance on home and cell phone. Toll free number did not work, the long distance number goes to a voice mail and they never call back. I have left a message a week for 3 weeks. I told the salesman this where we bought our new car and he could not believe it. I have no clue what to do. First I thought "OK, I'll just dispute it." Do I submit two separate dispute letters to each credit company one for me or one for my husband? This is where is gets weird. The lender appears on our credit report but the collection agency does not. The lender keeps sending me to them. What do we do?
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Bills.com
April 06, 2012
April 06, 2012
My guess, note my word choice, is the original creditor sold your collection account to a collection agent. The collection agent is no longer in business, based on the behavior you described. This is good news because you can dispute the debt with the credit reporting agencies (the credit bureaus) and no one at the defunct collection agency will respond to the credit reporting agencies' request for information. Without a response, the credit reporting agencies must, under the FCRA remove the challenged item.
I will assume both of you were joint borrowers on the vehicle loan in question. If so, either one of you can file a dispute with the credit reporting agencies.
Using the instructions at the page I just hyperlinked, file a dispute with each credit reporting agency reporting the repossession.
I will assume both of you were joint borrowers on the vehicle loan in question. If so, either one of you can file a dispute with the credit reporting agencies.
Using the instructions at the page I just hyperlinked, file a dispute with each credit reporting agency reporting the repossession.
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Mary A.
Elkton, MD | April 06, 2012
Elkton, MD | April 06, 2012
What about the fact that the lender is on our credit but the collection agency is not? How will that factor in when submitting the dispute?
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Bills.com
April 06, 2012
April 06, 2012
Excellent point! The fact the collection agent never reported this debt to the credit reporting agencies is further evidence it is out of business or asleep at the switch. Disputing a non-existent derogatory is pointless.
Take these two courses of action:
Take these two courses of action:
- Dispute the debt as reported by the original creditor. You have three first-class stamps to lose, and if the creditor fails to respond, you win.
- Work on improving your credit score.
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Jen L.
Novato, CA | April 05, 2012
Novato, CA | April 05, 2012
My boyfriend and I were in the midst of buying a home using his VA loan. Because we are not married we were only running the loan through his credit. We had a preapproval and put an offer in on a house. The home appraised 35,000 under the offer and the sellers wanted to full amount so the deal fell through. We had to reapply for another loan since the other deal falling through closed out the original loan. Upon trying to get a new pre approval letter the second time he was denied. Originally there was only one collection for $89. Once we went for the loan again a new collection had popped up from Dish Network. This is a claim for $1000 because they claim they did not receive back DVR boxes some years ago when we had service with them. It was advised that we pay the dept in order to get the another loan. We have contacted the debt collection company and they offered him an option to make payments. We are prepared to pay the debt but he was reading that making payments might look better. My concern is this possibly prologing us being able to move forward with a loan. What would be the best way to handle this debt?
Thank you
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Bills.com
April 06, 2012
April 06, 2012
The faster you can bring the debt to $0 balance the better. Either pay it in full or negotiate a reduced balance payoff.
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Melissa Y.
Bakersfield, CA | March 30, 2012
Bakersfield, CA | March 30, 2012
My husband and I are hoping to buy a home. I had 2 accounts in collections that I believe to be re-aged. The original debtors are Sears and Sprint and those fell off my credit report some time ago. However the collections agencies that picked up the debts are still showing up on my report and not due to fall off for a year on one and 2 years on the other, that would be to long for them to keep posting correct? I was told to obtain proof of the debt from the original creditor and send it to the collection agencies and demand under FCRA Section 605 that they be removed. However if I contact the original creditor to obtain proof could that possibly restart my debt?
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Bills.com
April 05, 2012
April 05, 2012
The key information to learn is the date of first delinquency for the accounts you mentioned. The date of first delinquency is the starting point for the 7½-year clock we mentioned in the original answer above. It is common for unscrupulous collection agents to report an incorrect, later date of first delinquency to the credit reporting agencies. It is a violation of federal law, the FCRA, to report an incorrect date of first delinquency.
You mentioned sending a letters to the collection agencies demanding they remove the derogatory information that is older than 7½ years. I think that is an excellent idea. Take care when making a reference to the accounts in question. You do not wish to restart the statute of limitations that may have expired on the accounts by reinstating the account. Notice I mentioned "statute of limitations." This is a separate issue from the FCRA 7½-year rule, and people confuse these two often. See the Bills.com article Statutue of Limitations to learn more about this legal issue.
When you write your letter, do not say, "my account" or "my debt" or "the amount I owe" or other similar phrases implying responsibility for the debt. Instead write, "the account you attribute to me" and "account No. abc123" and so on. Avoid the use of "I, me, my" when referring to these accounts. Consult with a lawyer who has consumer law or civil litigation experience if you have a concern about your letters.
You mentioned sending a letters to the collection agencies demanding they remove the derogatory information that is older than 7½ years. I think that is an excellent idea. Take care when making a reference to the accounts in question. You do not wish to restart the statute of limitations that may have expired on the accounts by reinstating the account. Notice I mentioned "statute of limitations." This is a separate issue from the FCRA 7½-year rule, and people confuse these two often. See the Bills.com article Statutue of Limitations to learn more about this legal issue.
When you write your letter, do not say, "my account" or "my debt" or "the amount I owe" or other similar phrases implying responsibility for the debt. Instead write, "the account you attribute to me" and "account No. abc123" and so on. Avoid the use of "I, me, my" when referring to these accounts. Consult with a lawyer who has consumer law or civil litigation experience if you have a concern about your letters.
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Yang V.
Brooklyn Park, MN | March 27, 2012
Brooklyn Park, MN | March 27, 2012
Hi, I have a credit score of 616 AND a student loan of $6000. I really want to buy a house. If I can find the money to pay my whole student loan off all at once, how will it reflect on my credit score? will it be a good idea? Or should I just keep paying the mim of the loan?
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Bills.com
March 27, 2012
March 27, 2012
Just paying off the loan will not increase your credit score. In fact, it may have a negative effect. The main components of your credit score are timely payments, credit utilization, credit mix (different types of loans and credit), the amount of time that accounts have been active, and number of new accounts.
If you have a large variety of accounts, then your credit score may not be affected. If not, then your score may actually drop. Keep making the payments on time. One other factor to consider when taking a new loan is your overall Debt to Income ratio. This will include your student loan. For more information read the Bills.com articles about home purchase and mortgages.
If you have a large variety of accounts, then your credit score may not be affected. If not, then your score may actually drop. Keep making the payments on time. One other factor to consider when taking a new loan is your overall Debt to Income ratio. This will include your student loan. For more information read the Bills.com articles about home purchase and mortgages.
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Elizabeth B.
Buford, GA | March 18, 2012
Buford, GA | March 18, 2012
I am looking to buy a house but I have 5 collection which totals to $800. My credit score is 610, If I pay it would that lower my credit score?
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Bills.com
March 19, 2012
March 19, 2012
Paying an old collection account can lower your score for a while. The reason for this is that the accounts are given greater weight when there is new information on them. What you should do is speak with a loan officer to see if you would have to pay off the collection accounts in order to qualify. If you do, paying them now is better than waiting to do so, as you can start working to improve your credit score sooner.
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Jay A.
Garden Grove, CA | March 10, 2012
Garden Grove, CA | March 10, 2012
I have a credit score of 670 i have 3 credit cards in good standing all under 30%. I have one credit card in collections for 5000. I want to apply for a school loan but i'm afraid i will be denied. Once i pay off my collections, how long will it be before i can get a school loan?
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Bills.com
March 10, 2012
March 10, 2012
School loans are not always based on your credit history or score. For instance, your credit score is not an issue when you are applying for federally insured student loans. These loans are primarily based on need, not on your past credit performance.
If you apply for a private student loan, your credit will be examined. Whether you have to pay an old collections account depends on the lender's decision. Speak to the private lender to hear its decision.
If you apply for a private student loan, your credit will be examined. Whether you have to pay an old collections account depends on the lender's decision. Speak to the private lender to hear its decision.
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Nathan W.
Franklin, WI | March 02, 2012
Franklin, WI | March 02, 2012
I have a very low credit score between 515 and 598 depending on the reporting agency. I recently paid off two judgements that I've had since 2008 and paid off all of my credit card debt. I have a car loan that is in good standing. How long will it be before I start to see some improvement in my score and how much improvement am I possibly looking at? Also, why is there such a large difference in FICO scores between the different agencies?
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Bills.com
March 02, 2012
March 02, 2012
Three reading assignments for you that will answer your questions:
- Delinquency, Debt Settlement & Credit Scores illustrates how different events can impact the credit scores of a person with a high starting score and a person with a medium credit score.
- Short Sale, Foreclosure & Your Credit Score shows how long it takes a score to recover from different events.
- Understanding Credit Score Discrepancies describes why the same consumer's data can result in each credit reporting agency generating a different score.
Ask any follow-up questions you may have on the appropriate page.
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