Does Paying Off Collections Improve Credit Score?

Everyone has forgotten to pay a bill at least once in their life. Typically, you’re sent a letter telling you that you now owe the original amount plus interest and late charges, but what if the letter never arrived because you moved to a new city or forgot to change your address?

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This is one of the most common ways people find themselves owing a debt that has gone to collections. Usually, the first time they hear about it is either when they get a call from a collection agency or when they apply for a new credit card or loan and are denied. Let’s take a look at what collections can mean for your credit score and how to rebuild your credit scoreby utilizing credit repair agencies. 

What Is a Credit Score?

In the United States, there are three credit reporting bureaus that effectively control whether or not you are approved for a loan. They are Equifax, Experian, and Transunion.

When you open an account with a bank for a loan or a credit card, it begins reporting the status of this account to the three credit reporting bureaus. Based on these accounts and a variety of other factors, the credit reporting agencies will assign you a credit score between 300 and 850. The higher the score, the better.

So long as you pay your bills on time and you aren’t maxing out your credit cards, your credit score will improve over time. Typically, creditors want to see a credit score of around 650 before they approve a loan. Others may allow lower scores, but this typically involves paying a much higher interest rate. 

How Do Collections Affect My Credit Score?

Before we go on, we’ll briefly explain what a collections agency is. Asking for money is a difficult job, so much so that many companies will decide to sell debt to a collections agency for pennies on the dollar. Those agencies will attempt to collect on the debt and make a profit. This process is completely legal so it won’t be going away anytime soon.

Having a collections account on your credit report will definitely bring down your credit score. If you choose to pay off the collections account, this demonstrates to the credit reporting bureaus that you are willing to pay your debts and will absolutely improve your credit score.

It’s not just collections that negatively affect a person's score. Perhaps sometime in the past, you could only afford to pay one of your credit cards and had to decide which credit card to pay off first. Anytime a payment owed on a credit card or loan is more than thirty days past due, a mark will be made on your credit report that shows which month and year you missed the payment. 

What if the Debt Isn’t Mine or I Paid the Bill Years Ago?

There are a thousand and one reasons a person may have a collection item that doesn’t actually belong to them on their credit report. Perhaps they have a common name or lived at the same address as someone who owed a debt, or somewhere, a social security number was mistyped into a computer. 

Whatever the reason, getting inaccurate and negative items removed from your credit report can be a hassle. Typically, it involves spending hours on hold with credit reporting bureaus as well as the people or companies that you allegedly owe money to.

This is where credit repair companies come in. Reputable companies like The Phenix Group have years of experience dealing with creditors and credit reporting bureaus, and have the resources to remove inaccuracies from your credit report with ease. Furthermore, such credit repair companies can offer guidance and tips on other ways to improve your credit score using a variety of proven methods. By improving your credit score, you’ll not only get approved for that loan you need, you’ll also get a much better interest rate that could lead to you saving thousands of dollars in interest payments.

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