What Is a Paid in Full Letter & How Does It Work?

When you fully pay off a debt, you may send or receive a paid in full letter. If you send a paid in full letter to your creditor or debt collection agency, it informs them that you’re making your final payment. If they send one to you, they are confirming that the debt has been paid in full. If your debt has been sent to a collection agency, you may also be able to negotiate a pay for delete arrangement, which may include having the debt reported as paid in full.

When Is a Debt Paid in Full?

A debt is considered paid in full when your entire balance is paid off. This includes the amount you borrowed — called the principal — plus any interest charges, fees, or penalties. Debt may also be considered paid in full if you’ve made an agreement with the creditor to settle it for less than the full amount. Debt settlement is only available for certain kinds of debt. Specifically, it can work with unsecured debt such as credit cards and some personal loans. 

Some lenders are willing to do debt settlement because they want to receive some payment, rather than none. If borrowers file bankruptcy, the debt could be wiped out entirely. If you are trying to settle a debt, you can negotiate both the amount you’ll repay and how the debt will be reported to the credit bureaus. Ask the creditor to report your account as paid in full rather than settled in full. Accounts reported as settled in full tell future lenders that you did a debt settlement agreement, which means they’ll view you as a riskier borrower. This can lead to higher interest rates on future credit or lenders denying new credit applications.

Credit Score Status After Paying Off a Debt

Paying off a debt usually improves your credit score. But if you pay off an account, think twice before closing it, even if you don’t plan to continue to use it. Closing credit accounts will cause a slight drop in your FICO score. This is because you’ll have less available credit, which will increase your credit utilization ratio.

The effect of a collections account on your credit score will depend on which credit scoring model is used to calculate your score. Different scoring models treat delinquency differently. The newer credit-scoring models — FICO 9 and VantageScore 3.0 and 4.0 — ignore collections with a zero balance, but older scoring models don't.

Your credit score is also affected by the age of your accounts. Closing older accounts can hurt your score. It’s important to know the factors that affect your credit score, especially if you want to apply for new credit. You can learn more about how your credit score is calculated in Upsolve’s Learning Center or schedule a free consultation with a nonprofit credit counselor.

What Is a Paid In Full Letter?

A paid in full letter tells a creditor or bill collector that you’re making your last payment on a debt. Alternatively, your creditor or a debt collection agency may send you a paid in full letter after receiving your final debt payment. Regardless of who sends the letter, the goal is to confirm the debt has been fully paid and that the creditor won’t pursue any further collection activities against you. Having this documentation helps ensure you and your creditor are on the same page. And if they do pursue collections against you, you’ll have written proof your debt’s been paid.

If you write a paid in full letter, make sure to date the letter and include your basic contact information, like your name, address, phone number, and account number. Also, include a statement that the debt has been paid in full and a request that the debt collector or original creditor responds with written confirmation of this. Finally, request that the creditor doesn’t take any further collection action. Sign the letter, and before you send it off, double-check it. Then, make a copy, include your final payment, and send the letter by certified mail, return receipt. You can find templates online to help you get started.

Reviewing Collection Accounts Listed on Your Credit Report

Collections accounts are bad for your credit score. Having them in your credit history will hurt your score, but paying them off can help it recover. Once you’ve paid a debt off, the collection agency should notify the credit bureaus. The credit bureaus then usually update your credit report to show that the debt has been paid. 

Sometimes this process doesn’t happen as it should and there are errors on your report, such as a paid account not showing as paid. After you’ve paid off an account, it’s important to check your credit report and ensure it’s accurately reflected there. You can also look for any other errors on your account at that time and dispute them. This will help boost your score. 

How can I correct errors on my credit report?

You can dispute inaccuracies on your credit report with all three credit reporting agencies by mail or online. This is called credit repair. You can also contact the entity that furnished the information (usually the original creditor or a collection agency) to the credit bureau to see if you can get them to correct the credit report error. Banks, mortgage companies, and credit card issuers are all examples of furnishers that provide information to the credit bureaus. 

Once you’ve filed your dispute, the credit bureau typically has 30 days to investigate, verify the information with the furnisher, and give you the results of the investigation in writing. If you dispute the error with the information furnisher, the creditor must also report the results of their investigation and give you a free copy of your credit report if the dispute results in a change. A creditor won’t update or remove information they think is accurate. 

Lastly, check for credit report updates. If an update doesn’t show up after several months, contact the credit bureaus and furnisher to verify it’s reporting your credit information to these bureaus. You can get a free credit report at least once a year to check for inaccuracies.

Let’s Summarize… 

A paid in full letter states that you’ve fully paid off an account. You can write one to your creditor or you may receive one from your creditor. If you write the letter, you should also include a request for confirmation from the creditor both that the debt is paid in full and that they won’t pursue any more collections actions against you. 

After paying off a collection account, make sure to review your credit report. Sometimes there are reporting errors and the account isn’t updated to reflect it was paid. In this case, you can file a dispute to have the information corrected on your credit reports. With these steps, you’ll be on your way to better credit.