When a consumer has an unpaid debt, the lender will generally conduct their own in-house collection efforts for approximately 30 to 60 days. If the debt remains unpaid for 90 days, most original creditors will forward the account to a third-party debt collection agency.

Borrowers with a late payment that reaches “collections” will have a negative entry appear on one or more of their credit reports with Experian, Equifax, and Transunion (the three major credit bureaus).

The negative credit report entry will also have an adverse impact on your credit scores. 

The credit score of an individual with otherwise good credit will typically decline somewhere in the range of 100 points after the unpaid collection debt becomes formally factored in by the credit reporting agency.

Paying the full balance through the debt collector may help improve your FICO^® credit score, as the adverse credit report entry will change to paid collection account status. The FICO score should improve, but not to the level it was before the bad credit account activity began.

FICO 9 and VantageScore 3.0 have implemented new credit scoring models that no longer factor in paid collection debt. Also, unpaid medical debt in collections is weighed less heavily now with FICO 9 compared to others such as unsecured credit card or personal loan debt.

Paying off collection debt has other positive credit-related benefits such as avoiding lawsuits and potential wage garnishments.

Can You Remove Paid Collections From Your Credit Report?

Per Experian, delinquent debts that reach collections remain on credit reports for seven years regardless of whether the balance is ultimately paid or not unless the debt was reported in error (inaccurate) or a “pay for delete” agreement was made with the creditor or debt collector.

Multiple negative credit report entries might appear pertaining to the same debt. For example, a credit card company that was the original creditor is unable to collect late payments and transfers the account to a debt buyer for collections and both parties have submitted an entry.

In this example, both entries will disappear seven years from the date when the original creditor reported the delinquency.

Consumers should check their credit reports to detect possible identity theft or other forms of fraud. For example, a thief might obtain your personal information and obtain an installment loan, amass a large credit card balance, or another available credit line.

How to Remove Paid Collections From Your Credit Report

‘Pay for Delete’ Letter

One potential strategy involves sending a letter requesting to negotiate a debt settlement agreement. Here, the consumer will pay all or a portion of the balance, and in exchange, the creditor will then have the negative entry removed from the credit bureau reports.

It is much less likely that an original lender, such as one that directly provided you with a student loan or car loan would enter these agreements; rather, they are generally negotiated with a debt collection agency.

Creditors and collectors are expected to report all consumer activity accurately and completely; therefore, the credit bureaus usually discourage this practice.

The Fair Credit Reporting Act does not address “pay for delete” activity specifically, meaning that many collectors who are eager to recover outstanding balances still engage in this activity.

While paying off collection accounts still has benefits, having the report entries deleted is increasingly unnecessary with FICO 9 and VantageScore 3.0 no longer factoring paid collection accounts into their credit scores.

Goodwill Deletions

Consumers with a credit report entry indicating a late payment might consider composing a “goodwill deletion” letter requesting that the lender forgive the mistake and have the negative mark removed from the credit bureau reports.

The primary elements of a goodwill deletion letter typically include: 

• All relevant details including account number, date of occurrence, etc.
• An acknowledgment of responsibility for the late payment
• An explanation citing the unexpected circumstances that contributed to the late payment such as loss of employment, medical emergency, etc.
• A brief description of how the negative credit entry is hindering current and future financial goals i.e., being approved for new accounts that build credit
• The letter should convey feelings of regret, courtesy, and optimism that might invoke empathy 

Goodwill deletion letters typically have more success for smaller negative credit mistakes like 30-day late payments. It helps if there is a legitimate reason for the missed payment, such as a personal financial hardship.

While a goodwill deletion letter doesn’t have a high chance of success with a completely delinquent account, it has been done before. 

Disputing a Collection

The Fair Credit Reporting Act requires that consumer account information reported to the credit bureaus is accurate. Creditors have an obligation to assess, verify, and respond when a consumer challenges the validity or accuracy of any reported information.

Written disputes are made either directly to the reporting creditor or the credit bureaus (Equifax, Experian, or Transunion). Each of the three major credit reporting agencies now has easy-to-use online tools for initiating a dispute regarding legitimate errors that you notice.

If you choose to print and mail a letter rather than submitting the dispute electronically, the Consumer Financial Protection Bureau recommends using certified mail and selecting the return receipt option.

The correspondence must clearly identify the potential error(s) and include copies of any supporting documentation i.e., canceled checks or account summaries.

FAQs

How Long Do Collection Accounts Normally Stay on Your Credit Report?

Collection accounts and other negative information will remain on your credit report for seven years. The seven-year period begins approximately at the time when the account originally became delinquent with the creditor.

Typically, after roughly 90 days the original lender, such as the credit card company or credit union, will sell the account to a debt collection agency. This is referred to as “sending it to collections”.

In many cases, after an account is sent to collections, the credit report will contain two separate negative entries for the same delinquent account. However, the good news is that both marks will be removed after seven years elapse.

Why Did My Credit Score Drop When I Paid Off Collections?

Your credit score is calculated using scoring models that are created by the Fair Isaac Corporation (FICO) and VantageScore. The formulas used by both companies continue to evolve, as we have seen with versions including FICO 8 and 9 and VantageScore 3.0 and 4.0.

Consumers must understand that regardless of whether an account in collections is paid or unpaid, your credit score is based on a much broader scope of your overall credit profile and each factor is weighted. The latest summary from Experian is outlined below: 

• Your active payment history (35%)
• The overall amount of debt and credit utilization ratio (30%)
• Age or length of credit history (15%)
• Opening or applying for new credit accounts (10%)
• The “credit mix” (10%)

When You Pay Off Collections, How Long Does It Take For Your Score to Drop?

You will likely see an improvement in your credit score in a month or two when you pay off old accounts that were in collections. The credit score increases result from those accounts being transitioned from unpaid to paid.

Keep in mind that the latest credit scoring models, including FICO 9 and VantageScore 4.0, no longer penalize those with collection accounts that have been paid. Unfortunately, not all lenders have upgraded to these most recent scoring models—particularly mortgage lenders.

Overall, paying off old collection accounts is generally worthwhile. Aside from the benefit that the latest FICO and VantageScore models offer, prospective lenders may hesitate to extend new credit to consumers that have failed to reconcile their past commitments.

CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.

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