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Posted on 17 January 2020 | 7,107 views

Paying off a Collection can Drop Your FICO Score by 35 Points

So you have some extra money in your pocket and you’ve decided to pay off one of your credit card collections early. You know that credit scores are extremely important so your goal is to pay off the collection that will yield the most credit score improvement — the “FICO ROI” (return on investment).

Paying off a collection balance of $1,000 can drop a credit score of 630 to a 595 when paid in full using a credit scoring tool built by FICO.

Unfortunately this is an all too common occurrence as any of you with collections have probably experienced. There’s a deficiency in the credit reporting system that shows recent activity on a collection account, if you were to make a payment. This recent activity makes the collection look younger and can result in a FICO Score drop.

In this simulation, the “recency” of the collection went from “greater than three years old” to less than 12 months. When you make a payment on a collection the collection agency will report the new balance to the credit reporting agencies. The “date reported” on the collection account will be the then current date, which can lead to the score drop.

These results, while simulated, are a very accurate reflection of what will likely happen to your credit scores if you pay off one of these collections. So, if you want to pay off a collection early, do so because it’ll save you money in interest in the long run — don’t think that your scores are going to shoot through the roof by paying the collection off.

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