Collection companies have done a great job over the years of convincing consumers that paying off collections will raise their credit scores. Many are actually surprised to learn that paying off collections will actually lower their credit 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 considered high, due to that collection. So their credit score will not go any higher if it is paid off, because paying off a collection after the fact, doesn’t lower the risk of defaulting in the future.


However, the DATE OF LAST ACTIVITY is updated to the date the account was paid off. So 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.


Crazy isn’t it? You are trying to do the right thing and pay off collections, but your credit scores can be lowered as a result.


Many people who are considering buying a home or refinancing think that their credit needs to be nearly perfect.  That’s a common misconception.  Our recommendation is to stop worrying about something that may not be accurate.  As part of your employee homeownership benefit, you can call your benefit advisor with Advantage Home Plus and they will help you understand what, if anything, you need to be focusing on to get your credit in shape.  There are many low down payment, government loans and down payment assistance programs that only require a 600 – 620 credit score.


Bottom Line:

Before you spend money to pay off collections that you “think” will improve your credit score, call your Benefits Advisor at (800) 376-4603 or email for a complete credit analysis.  Your credit may be fine just the way it is!  If not, your advisor will help you identify exactly what you should be doing to improve your score.