Ask Stacy — Will Paying Old Unpaid Debts Improve My Credit Score?

Your credit history is important to your overall financial health for at least three reasons.

First and foremost, a bad score means higher rates when you borrow. Second, because a bad credit history can also impact other expenses, like your car insurance. And finally, lousy credit could also impact your ability to find work.

Is this fair? Debatable. But like it or not, it’s a fact. So it literally pays to keep track of your credit history and score and keep them in the best possible shape.

Which brings us to this week’s question:

My 23-year-old son has bad credit. We have read about working on improving his credit score on your site. He is starting to understand more about this now since I have been working with him. He has recently paid off a credit card that had been canceled. However, he also has two utility bills that are on collections from out of state. If he pays these off will it change his credit at all? Will it always affect his credit in the same way since it already shows up on his credit report? Is there any chance to have it removed if he pays?
— Karen

Before we get to Karen’s questions, let’s review a TV news story about the shortest path to a higher credit score.

Now, let’s see how unpaid bills, otherwise known as collection accounts, affect your credit.

What accounts in collections do to your credit score

A few years back, I did a story about how specific negative actions can affect your credit score. Below is a recap. Keep in mind that a perfect FICO score is 850, and to get the best possible deals, depending on the lender, you’ll need 730-760.

• 30-day late: 60-110 points
• Debt settlement: 45-125 points
• Foreclosure: 85-160 points
• Bankruptcy: 130-240 points
• Maxed-out card: 10-45 points

The higher end of the ranges above generally would apply to those with the highest scores (780) and the lower end to those with lower scores (680). Also important: The older the offense, the less the impact.

While I wasn’t able to get the specific point impact of accounts in collections, they’d fall somewhere between a 30-day late and a bankruptcy. Not good.

What paying off collection accounts does to your credit score

Because unpaid bills will devastate your credit score, logic would suggest that paying them off would send it in the opposite direction. But not all is logical when it comes to credit scores.

According to the creator of the most widely used credit score, the FICO score, paying accounts in collections won’t help. Here’s what myFICO.com says:

As far as your FICO score is concerned, two things are considered: Has a collections appeared on your credit report, and when it was reported. So whether or not you pay your collections off is really a personal decision.

What FICO is saying here is that paying off a debt in collections won’t improve your score. One of the big three credit reporting agencies, Experian, agrees. Here’s what the “Ask Experian” team says:

Paying the debt won’t necessarily help your credit scores. Accounts that get to the collection stage are about as negative as it gets. Only bankruptcy is worse. As a result, any improvement, especially right away, probably will be very minor.

In short, paying debts in collection won’t influence your credit score. It may, however, influence a lender who looks beyond your score to its source, which is your credit history. If you were a lender, which would you rather see in a borrower’s credit history — an account they paid years late, or one they blew off and never paid at all?

Then there’s your personal morality score, otherwise known as a conscience. When you borrowed money, you gave your word you’d pay it back. So barring a legitimate dispute, that’s exactly what you should do. Or, at least, that’s the way I was raised.

Now let’s look at some possible ways Karen’s son might get these negatives removed from his credit history.

You could try disputing it

The Fair Credit Reporting Act allows you to dispute anything on your credit history. Once you file a dispute, the Credit Reporting Agency, or CRA, typically has 30 days to investigate the item, which they do by going back to the agency or lender who put it on your report. If that agency or lender doesn’t respond, the CRA can’t determine the item is accurate, so they have to remove it. They are then required to notify the other CRAs so it gets removed with them as well.

You’re obviously not supposed to dispute items you know to be accurate, and I’m not advising you do so. But I can tell you, it’s been done. It’s kind of like pleading innocent to a traffic ticket, then hoping the cop doesn’t show up for court: automatic dismissal.

If the items causing problems for Karen’s son are accurate, they’ll most likely be verified, so this is a long shot. But it doesn’t cost anything to try.

Learn how to dispute items with Experian here, Equifax here and Trans Union here. While all these companies will try to get you to buy your credit history from them before filing a dispute, don’t bite. Get it free at AnnualCreditReport.com.

And, by the way, there are free places to get a credit score and check whether this strategy is working. A couple of those are Credit Sesame and Credit Karma.

If you’re going to pay it, try to get something in return

Some negative marks in your credit history (like a foreclosure or tax lien) aren’t going away, but collection agencies and lenders may remove charge-offs or collection accounts if you negotiate with them.

Before you pay anything, write a letter to the creditor and ask to have the account removed or marked as “paid as agreed” in exchange for your payment. After the creditor agrees (in writing) to remove the negative mark, pay the balance.

It’s called “pay for delete.” Here’s a sample letter you can try, courtesy of Creditmagic.

Name of Collection Agency
Address of Collection Agency

Re: Collection Account for Original Creditor Account Number
Amount: $50.00

Dear Sir or Madam,

I am disputing the validity of the debt referred to above. I am not aware of the account number, and you have not informed me of the existence of this account.

I am willing to pay this account IN FULL (or a settlement percentage, whichever is feasible) if you agree to immediately delete the account from the credit reporting agencies (namely Equifax, TransUnion and Experian) that you have reported to, and validated this account. My sole purpose is to get this item removed from my file. This letter should not be interpreted as recognition of the debt or acknowledgment of liability for the debt.

If you accept the terms of this agreement, the certified amount of (whatever is owed) will be sent to your collection agency provided there is complete deletion of any reference to the debt from my file on all the credit bureaus that you have reported to, and the debt is validated. As the full amount demanded will be paid back, there should not be any waiting period to delete this item from the reporting bureaus.

Your agency should delete all information regarding the account from my credit files within 10 business days from the receipt of the payment, as mentioned in this agreement. The terms of this agreement will not be discussed with anyone but the original creditor. No third party will be informed if contacted and no acknowledgment of the debt, any kind of payment, or settlement will be discussed if I am contacted by the Reporting Agencies.

Following the acceptance of the agreement, please prepare a letter on your company letterhead unambiguously agreeing to the aforementioned terms and conditions and have it signed by your agency’s authorized signatory. This letter will imply a legal contract, enforceable under my state law.

If I do not receive an approval letter within 15 days of your receipt of this letter, I will withdraw this offer.

Please communicate regarding this account to the address mentioned below.

Your Name
Your Address
State Zip Code

If you’re not going to pay it, ignore it

If neither of these approaches work and you don’t require an instant fix to your credit score, the best idea may be just to let it go. Other than a clear conscience, you’re not going to gain much by simply paying off the debt. And the older it gets, the less it will impact your score. After seven years, it drops off entirely.

But if you do decide to contact the lender or collection agency, a word of caution. Note this language from the letter above: “This letter should not be interpreted as recognition of the debt or acknowledgment of liability for the debt.” There’s a reason it’s there. Making a partial payment on a debt or in any way acknowledging its accuracy could restart the clock. Not the seven-year clock when the debt falls off your credit report — that never changes — but the statute of limitations clock.

I won’t bother with a long explanation of what this means, because I’ve already written about it in “Ask Stacy: Is There a Statute of Limitations on Debt?” Suffice to say that acknowledging a debt is legitimately yours could give the lender or collection agency the ability to sue you and get a judgment when they may not have otherwise been able to do so. So whenever dealing with anyone attempting to collect a debt, choose your words and deeds very carefully.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can read more of my work here.

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