• The Credit Cowboy

Does paying off a collection raise your credit score?

Updated: Jun 18, 2018

By: Steve Altonian

Probably the most misunderstood subject of credit has to do with how to deal effectively with collection & charge off accounts....

Many Loan Officers & their borrowers alike are under the impression that satisfying these accounts will raise a FICO score.  

Myth or Matter of fact:

"Does paying off a collection raise a credit score"?

Common sense would dictate yes.  Ethically, it makes sense.  The client is making good on their commitment, & even though it is belated, this should still result in a positive impact on their credit score............Wrong

Isn't is ironic that by doing the "right thing", in this instance it is actually the wrong thing.  It doesn't help your credit score one bit. 

I know what you're thinking;  I'll have my client pay the collection & I'll just get a "Pay for Delete" letter & do a rapid re-score.  Well, "Pay for Delete" letters are frowned upon by Fair Isaac & the 3 Major Credit Bureaus.  Collection Companies can lose their licensing if caught doing "Pay for Delete" letters.  Why?  Fair Isaac & the Bureaus want ALL information on a profile accurately reported.  Technically "Pay for Delete" letters are in direct  violation of the Collection Agencies terms of agreement with FICO & the Bureaus.  "Pay for Delete" letters are few & far in between these days. 

"Pay for Delete" aside, there are still some Loan Officers who hold to the myth that they can have the client pay off their collection, do a rapid re-score & get their credit score to a qualifying level.  Doesn't work, & it never did.  Rapid re-score only works if you have new information that changes the algorithm of the credit report.  

Whoa Credit Cowboy, I think I'll just pay off my Collections:

“Not so fast, ya better think this though”

You cannot buy back your credit.....Think about it, if everyone could simply pay back any debt 3 months, or even 3 years later with zero repercussions, there is no incentive to EVER pay your bills on time. People would pay back their debt when they feel like it, figuring everything is all good now that they have finally paid their debt. It doesn't work that way. Financial institutions look at your credit history and score as an indicator of how you have, & will pay any debt incurred. They want an accurate picture of you as a borrower.

Why doesn't paying off a collection change the algorithm?  Because the dollar amount simply doesn't matter or affect the credit score . It doesn't matter if you owe $30 or $30,000, it still affects your score exactly the same.  It is the mere fact of having a collection on your report that is damaging to a score, not whether or not the collection has a balance.

Fair Isaac Corporation (FICO) looks at the accounts DLA, or date of last activity, to determine the impact a derogatory item will have on the credit score.  The longer a collection is seasoned on the report, the less impact it has on the credit score & the overall profile.   In my experience I have found that the weight is in 12 month increments.  Year 1 (0-12 months) holds by far the most weight.  Year 2 (13-24 months) brings some relief to a credit profile, but can still be extremely damaging.  Years 3 & 4 carry weight as well, but it diminishes the impact.  Years 5-7 still technically can & do affect the score, just not a severely.

So why not pay off a collection?  Can't they just pay it, & we can do a rapid rescore? No because you will update the DLA.  When a payment is made on an aged collection account, the collection agency will send an update to the credit bureaus to reflect the account status as "Paid". When this happens, the date of last activity is updated to the current date.  FICO scores can drop by as much as 100 plus points, depending on how old the collection was and the overall credit profile.  Not a good move, no matter how well their intentions are.

And the ONLY time any Collection account should be paid off is at closing IFthe Underwriter requires it, or you must have the borrower pay the collection because of DTI issues.....

"Does paying off a collection raise a credit score"?

Absolutely not........In my business & yours as a Mortgage Professional, The only good collection is a DELETED collection....  Please feel free to reach out to me to see how we consistently achieve this....

This is The Credit Cowboy & I am out.....

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