Does Paying Off Collections Improve Credit?

By Jessica Brita-Segyde on May, 21 2021
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Jessica Brita-Segyde

Yes, but the exact amount of improvement is a guess. Only the three credit bureaus (Equifax, Experian, and TransUnion) know their algorithms for determining FICO scores. In general, paying off collections will improve your score and is generally advised for those seeking a mortgage. As with all financial decisions. this one should be carefully considered before you move any money around.

Opportunity Cost

Consider the opportunity cost of paying off a collection versus something else. Prospective borrowers may want to pay down other debts to bring down or eliminate monthly payments (like paying off that old installment loan for the sofas you bought three years ago). This, too, could increase credit score and may even result in better loan terms. Having a higher credit score combined with fewer monthly payments could result in better loan terms overall. Your lender might be able to a lower rate and/or features not previously available like a 15-year loan term.

If you’re considering opening a low-interest credit card or installment loan to pay off things like collections or old credit cards, think it through. A zero-percent-down loan may be tempting but the interest-free term may only last for the first few months (or less). Plus, the new credit line could actually pull down your score if it is unsecured with a high maximum balance.

If paying off a collection would wipe out your savings, you may want to wait. Most loan programs require a down payment of at least five percent of the home’s value.

If it comes down to paying off one debt versus another, discuss the situation with your loan officer. Your L.O. can offer advice regarding different underwriting scenarios and how to proceed.

Stay Strong

Once you’re approved for the loan, know that your credit score at the time of approval is not set in stone. The underwriter may request an updated credit pull. If they do, anything new will show up. This applies to collections, credit card purchases, and new installment loans like cars or furniture. The good news is that positive choices, like paying your bills on time, will also manifest in a late credit pull. Take care to keep your credit clean during your home search (and after!) to ensure your financial future. A strong credit score opens opportunities.

Stay in the Know

If you’re concerned that collections may show on your credit report, find out before you apply for a mortgage. Go to for a copy of your report. You can do this once a year for free. The free report won’t show your credit score but it will show all accounts, payment histories, collections, liens, and other information that creditors have reported to the three credit bureaus. Some websites, like Credit Karma and Mint, advertise free credit scores but they will market to you in exchange for the information.

Mistakes Happen

If you think a collection was put on your credit report by mistake, or if you already paid it, here’s what you can do to get the erroneous reporting corrected. First, know that it may take time. Consider taking a day or half-day off work to focus on credit cleanup. You will need to make phone calls, wait on hold for long periods of time, and provide documentation to prove your case. Most of the customer service reps trained to handle credit disputes will be kind and helpful, but the burden of proof still lies with the consumer. You will probably have to submit a written statement to one or more of the credit bureaus and it will take some time for the collection to be removed from your report. The take-away here: check your credit report now, even if you don’t plan to apply for a mortgage right away. When you are ready to start shopping for a home, contact the experienced loan team at Ruoff to get started!