It’s counter-intuitive and weird, but it’s true. Paying off old collection accounts will often lower your credit scores.
Nevertheless, if you’re rebuilding your credit for a long-term goal, then you should still pay off collections whenever and as fast as you can.
Here’s the problem with paying off collection accounts: they stay on your credit record even after you pay them off. Yes, they will show a zero balance, but the credit bureaus and credit scoring system still counts that entry as a collection account.
Paying it off will also make that collection account a fresh entry — rather than an old one.
In many ways, that is probably the biggest reason why paying off your old collection accounts may hurt you. FICO and other credit scoring systems give slightly more weigh to the most recent credit entries. So that old collection account becomes a recent report… of a collection account. Yes, it’s now a zero balance, but it’s still a collection account.
Fortunately, the pain is temporary. After six months or so, that collection will start fading away in strength, especially because it is now paid off.
Plus, you get extra credit if the collection is for a revolving account. Your history and balances on revolving accounts (i.e. credit cards) make up nearly a third of the scoring factors with FICO credit scoring systems. And in that big grouping is the calculation of revolving account balances divided by credit limits. By removing that credit card collection, you effectively lower your credit balance-to-limit ratio, which will give your score a boost after a few months.
For more information, check out the credit repair guides at CreditRehab411.com.
