How much does your credit score increase if you pay off accounts in collection? I would like to buy a home but I am not sure if I qualify for a mortgage.

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

In short, paying off or settling your accounts in collection should have a positive impact on your credit score although it is challenging to specifically determine by how much, and how much time it takes, for your score to increase. Regardless of the exact improvement in your credit score, eliminating accounts in collection from your credit report should improve your ability to qualify for a mortgage, although as we explain below, you may not be required to do so.

There are several reasons why it is challenging to determine exactly how much your score will improve if you pay off or settle the accounts in collection. First, different types of accounts are scored differently by the credit bureaus.

For example, medical accounts in collection carry less of a penalty than other types of accounts. So if you pay off or settle medical accounts in collection, the positive impact to your credit score is actually less as compared to paying off non-medical accounts.

Other factors that determine how much your score could improve include the credit score model used, how long the accounts have been in collection -- the longer the account has been in collection, the less the penalty -- and if you have other derogatory marks on your credit report. If you have other negative events on your report such as late payments, delinquent accounts or charge-offs, then resolving your collection accounts may have a less significant impact on your score.

Please note that paying off the account in full may have a more positive effect on your credit score as compared to settling the account for less than the debt amount owed and it is usually preferable to pay off the total debt balance, if possible.  Another potential solution is to establish a payment plan that pays off the full account balance over time.  Although this approach has less of an impact on your credit score in the near term, mortgage lenders see that you are taking steps to pay off the debt, which is positive.

In general, your credit score could improve by ten to thirty points when you pay off off accounts in collection, depending on your circumstances and the factors outlined above, but it is impossible to provide a specific figure because everyone's situation is different.

In terms of the timing, it can take one-to-three months for your score to increase after resolving the collections. Although the creditor should report that the account has been paid off within 30 days -- by reporting a zero balance -- this does not always happen and you may need contact the credit bureaus to make sure your account information is current.  Working with the bureaus to update your credit report or to resolve a dispute usually takes two-to-three weeks but you can accelerate that timetable by providing documentation that demonstrates that you have paid off or settled the accounts in question.

Finally, if you are considering paying off accounts in collection because you want to apply for a mortgage, it is important to understand that having accounts in collection does not automatically disqualify you.  For a standard conventional mortgage, you are not required to pay off collection accounts unless the lender requires it, usually because the debt balance is significant.

Review Can You Qualify for a Mortgage with Collections?

 For an FHA mortgage, you are only required to payoff or establish a payment plan if the total balance of your collection accounts is $2,000 or higher.  Please note that medical-related debt is excluded from the total account balance for an FHA loan.

In closing, if possible, we recommend that you pay off accounts in collection before you apply for a mortgage but it may not be necessary to get approved for the loan.  Paying off the accounts may increase your credit score and remove uncertainty from your loan application but if your current score meets the lender's requirements you may already qualify.

We recommend that you contact multiple lenders in the table below to understand their qualification guidelines.  Based on the feedback you receive from lenders you can develop a plan for your debt that works best for your individual situation.

Sources

“How do I get a copy of my credit reports?”  CFPB.  Consumer Financial Protection Bureau, March 29 2019.  Web.