Paying Off Collections and Debts to Improve Credit Score

Reader Question: If I paid all of my collections off and paid my credit cards down this month will my score improve next month?

I have no way of knowing for sure, but it's certainly possible. The credit scoring models tend to be somewhat "quirky," to be put it nicely. For example, this article on MSN Money explains a situation where a person paid off an old debt, only to have it hurt their score. While such scenarios are rare, it can happen too. Like I said ... quirky.

If I were you -- and I had the means to do so -- I would go ahead with the plan to pay off your collection accounts and pay down your credit cards. In addition to improving your life in general, there's a strong chance this could improve your credit score significantly. Whether it happens by next month or not, I cannot say. But it's possible. I have personally witnessed somebody raising their score by more than 90 points in a couple of weeks, just by resolving some errors on his credit report.

Generally, speaking it's best to eliminate any collection items that are on your credit reports. Such negative entries can stay on your credit for up to seven years, and they will prevent you from achieving your highest score possible.

Paying down your credit card balances is also a good idea in most cases. For one thing, credit cards typically have a high interest rate (compared to other types of financing). They are actually designed to keep you paying for life, if you only make the minimum payment each month.

Also, by paying down your balances, you are improving your credit utilization ratio at the same time. This is a financial term that compares your total available credit to the amount you are currently using. And as you can see by the chart below, it accounts for 30% of your FICO credit score.



The blue area in this chart (payment history) also includes outstanding debt, collection items and the like. So by reducing your credit card balances and settling your collection items, you are improving two of the strongest factors that influence your score. (Here's an explanation of the entire chart if you're interested.)

Personally, I think it's a wise idea to do both of those things. There's a very good chance you'll see an increase in your credit score, and it's even possible that it could start within a month or two.

Hope that helps. Good luck.

Related Q&A sessions:

• Should I pay off my debt to increase my credit score?
• How long does it take to make significant improvements?

Disclaimer: This blog provides financial suggestions and considerations of a general nature only. It does not provide specific financial advice. So you should not make any financial decisions based solely on the information provided here.