Will Paying Off Debt Increase My Credit Score?
If you have ever applied for a loan in your life, you probably know what a credit history is. Credit history (or credit score) is a set of indicators by which the bank assesses your solvency and decides whether or not to give you a loan. Unfortunately, many factors can damage your credit score.
One of them is overdue credit or collection of debt. In fact, this is the worst thing that can happen to your credit history. Even with just one negative entry, and it will be challenging for you to get a new loan or credit.
However, paying off debt collections is the best way to increase your credit score, so you might want to try this method. But if you want your credit score to be renewed after the payment, you have to do it right. Let’s take a look at some possible ways of paying off collections to raise your credit score.
First, let’s see what your credit score is all about. It is most affected by your FICO score. FICO (formerly known as Fair Isaac Corporation) is the analytical company that is best known for its consumer credit ratings. Banks use FICO scores to decide whether to grant a loan or credit.
The highest number of FICO points is 850; the lowest is 300. To get your credit approved, you just need to have 730 points. Anyone with points above 650 is considered to have a good credit history. What actions can lead to the loss of these points? Here is a short list:
- Going beyond the card limit costs from 10 to 45 points
- A debt settlement procedure will cost from 45 to 125 points
- A 30-day delay in payment will cost you between 60 and 110 points
- Foreclosure costs from 85 to 160 points
- Bankruptcy will cost you the most – from 130 to 240 points
We can assume that the number of points for a collected account will be somewhere between 60 and 240 points, which is not great at all. So, what should you do to avoid most of the consequences of a debt collection? Let’s see.
The first thing you have to do when you have a debt is to make sure it’s really yours. We will explain: these days, fraudsters can arrange a loan or credit in your name, even using just a copy of your passport. So, if you have a loan that you haven’t heard of before, be sure to specify when and how it was issued. If this is a fraud, do not pay anything and deal directly with the bank.
If the debt is yours and you want to pay it, but it will continue to be included in your history, this procedure will be useless. So, before you pay collectors, be careful to make sure that the debt entry disappears from your credit report. Only, in this case, will paying off a collection help your credit score.
It is best to erase the record, but if it doesn’t work, arrange for the debt to be marked as “Paid in full” or “Settled”. Next, we will look at several possible options for repaying your credit or mortgage with some positive and negative consequences for your credit score.
There are four different tactics for closing a debt collection, some of them are perfect for your credit score, and some of them are not so good, but still acceptable. Let us start from the bottom.
The most obvious way out of a debt situation is to pay the entire amount immediately. However, does paying off debts improve credit score? Well, a little. But there’s nothing wrong with it. The main thing is to do everything competently. After paying the entire amount, make sure that the collector has updated your credit history and marked your debt as paid in full.
Be sure to take the documents from the collector that confirms the payment. With this paper, you can dispute a credit history update if the record that the debt has been paid does not appear.
The main difference between these two formulations is that “Settled” increases your credit account slightly less than “Paid in full”. But both are good enough.
The ideal way out of this situation is to remove all debt records from your history. Not all collectors agree to such a proposal, but we will still consider this option. If you are not sure that you are able to do it, consider hiring professionals from DebtQuest USA. Financial experts will negotiate the best deal for you in no time, and your credit history will skyrocket.
You can try to negotiate a special deal with a collector – to pay the debt in full in exchange for a debt removal. But before making any remittances, send a request to your collector and wait for his or her response in writing. Then, make sure to get a written document that says that you have paid the debt in full.
To conclude our detailed answer to the question “Does paying off collections help credit score?” we will discuss the ideal option for improving your credit history. First, let’s get to the bottom of what a settlement is. This is the sum that is a few percents less than your debt. Offer the collector to arrange for the payment of the settlement fee in return for the deletion of the debt records and get the deal in writing.
This way, you will not only pay less but also be able to clear your credit history and get yourself a few FICO points to get the approval of the next loan if needed. We advise you to entrust your negotiations with collectors to professionals. DebtQuest USA will be glad to assist you in such a challenging task as paying off the debt. Don’t hesitate to call DebtQuest USA and get the services that you need!
Of course, it’s best never to bring the loan situation to collectors. However, if you find yourself in such a difficult position, do not rush into a panic or get another loan – consider the options we have offered first. To answer the question, “Does paying off a collection improve my credit score?” we say – yes, it does. But you have to do it right to get the best result possible.