Does Paying All the Debt Collectors Improve My Credit?

Credit History

Your credit report contains a record of your financial history as reported by companies with which you do business, including banks, credit card companies and other financial institutions. Reports carry a record of your debt volume, payment history, whether you've filed for bankruptcy and how many credit cards you carry, including credit cards that have been closed. Your credit score is a three-digit figure calculated to provide a snapshot of your ability to manage credit to lenders, including credit card companies, banks and other financial institutions. High credit scores reflect positive, longstanding relationships with lenders, low debt loads, a history of on-time payments and a diverse array of credit including installment loans (such as car loans or home mortgages) and revolving accounts, such as credit cards. Low credit scores reflect high debt compared with income, spotty payment histories and negative items such as bankruptcies.

Paying your debt collectors can improve your credit overall because of reduced debt loads. If your credit was low because of high debt-to-income ratios, paying down debts will lower the ratio and boost your score. Paying debt collectors gradually can result in a slower improvement of credit scores; making large payments to reduce or eliminate collection account debt can improve scores more rapidly. Combining debt collector repayment with regular, on-time payments for those accounts still in good standing will, over time, contribute to a more positive payment history and improved credit score.

Although paying debt collectors reduces your overall debt, those negative marks on your credit don't disappear once debt has been eliminated. Individuals or financial institutions viewing your credit report will still be able to see that accounts were turned over to collections because of nonpayment for a specified period of time. The Fair Credit Reporting Act states that most debts must be stricken from your credit report within seven years of the first reported delinquency. Even if your credit score begins to rise within a few months of repaying debts, those original delinquent payments and collection agency referrals will continue to appear. Address this problem by asking agencies to mark the account, "paid in full" once debts have been cleared. You can also try asking them to remove the account from your credit history once it's paid off; they'll probably say no, but it's worth a try.

The amount of time that negative items may appear on your credit differs from the statute of limitations, which refers to the time period during which collectors can attempt to get their money back in court. Although this doesn't affect credit reporting, many consumers confuse the two terms. In some cases, making a payment on an old debt collection account can restart the clock on the statute of limitations for collecting on the account in court. If the statute of limitations has already expired on your account, the collectors may not be able to seek repayment in court but potential lenders may still see a nonpayment status on your credit report.