Paying Off a Collection Can Reduce FICO Score
Here's how why what to do
Collection companies have fibbed over the
years of telling consumers that paying off collections will raise their
credit scores. However, paying off collections lowers their FICO scores.
Collections are usually reported on the credit as a “9” status or
collection account. This means the account has already been "written
off" and assigned to collections by the creditor. Once an account
is reported this way on the credit report, the damage to the credit
score is irreversible, unless that item is removed completely from the
report. If the account is paid off, the collection company reports that
the account now has a $0 balance, but they do not usually delete the
item off the report.
The account has already become a collection, and the risk of the
consumer defaulting on another account is already very high, due to
that collection. Credit score will increase if it is paid off, because
paying off a collection after the fact, doesn't lower the risk of
defaulting in the future. It actually may decrease the scores because
it shows now as a recent problem in addition to being written off in
the past as two strikes.
However, the DATE OF LAST ACTIVITY is updated to the date the account
was paid off. if that account
was sent to collections 3 years ago, the date of last activity is 3
years old and the impact to the credit score is not as much. But if the
consumer pays off that collection today, they just update the date of
last activity to today's date, sometimes causing the scores to go DOWN
as a result.
Clients try to do the right thing and pay off collections, but their
scores can be lower as a result. Some loan programs do not require
borrowers to pay off Medical Collections, read the details and know the
end program BEFORE you pay anything off. FICO Score is an important
piece that drives mortgage interest rates so you don’t want to find out
an interest rate is jumping upwards because the Borrower paid off a
debt. Oh no – painful.
Help your clients work with collection companies to have
their negative item removed completely from their report, if they pay
it off. Negotiate a settlement
with deletion!!!
Any more questions? Call me!
Caroline Gerardo Barbeau
C G 949- 784- 9699
NMLS 324982
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