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Paying off delinquent debt bumps up credit score

Erica Sandberg

July 14, 2015

QHi Erica,

On my credit report, there are two collection activities for amounts of $89 and $70. I got my TransUnion FICO score today and it is 719. Will it go up if I pay these accounts and by how much? What do you recommend I do? –Vanessa

ADear Vanessa,

Your FICO score is quite good, especially in light of the collection accounts that are smudging your consumer credit reports. In fact, it's only a few points away from the top category of “excellent,” which is generally considered to be in the mid-700s and above. FICO scores go all the way up to 850, and the closer you can get to that figure the better.

What you should do now depends on a number of factors, but first I'm going to speculate a little on what has been happening. Ask Erica

I bet the bills went into collections many years ago. Had they first started to appear on your reports this or even last year, your scores probably wouldn't be as high as they are right now. That's because what you've done lately matters far more to lenders than what occurred long ago. I also believe that you've managed credit well since the accounts when into collections. Maybe you have a couple of credit cards that you keep in fine standing by charging and paying on time, as well as maintaining a low-debt-to-credit-limit ratio. Or you've taken out and paid off a loan or two, without skipping a beat. Payment history and credit utilization are the two most important factors in your credit score, and when you've proven your acumen with all types of credit products in the past 24 months, scores will naturally climb — even when a couple of minor dings are still clinging to the reports.

So you have a choice: pay the debts and have them reflect a $0 balance on the reports, or let them be until they age off. As per the Fair Credit Reporting Act, negative marks such as delinquencies, defaults and collection activity can only remain on a person's report for a total of 7 years. After that, they can't be listed anymore. While they are in effect, FICO and other credit scoring models will input that data into their algorithms to develop a score, but the older the data gets, the less it is weighted.

If you paid the accounts to $0, you might see a scoring change, and it could be enough to kick the numbers up to the excellent range. It's impossible for me to say by how much, though, as the exact calculation for these scores is proprietary.

This means that for $159, you can make an immediate (but potentially slight) scoring difference. But if you wanted to wait it out, you'd most likely get the same result. You have to ask yourself how quickly you need a boost and what purpose it will serve. If you're in the market for a mortgage, every point can count and collection accounts aren't looked upon favorably by loan underwriters, so the investment could be wise. However, if you won't be applying for a mortgage, car loan or credit card in the immediate future and want to save a few bucks, that may be more attractive.

What is most critical is that you continue to focus on adding more great information to your credit reports. Just remember what all lenders want to see: that you fulfill your financial obligations in a responsible manner. Do so and your credit scores will remain on a steady trajectory.

Got a question for Erica? Send her an email.