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Paying off a trade line in collection

Credit scores hold true to the axiom that “Actions speak louder than words.”  How each of us acts toward credit and creditors has proven to be highly predictive of our future repayment risk. 

FICO has found that some consumer actions are more predictive than others.  One that we are often asked about is the act of paying off a seriously delinquent debt such as an account in collection status. Eventually making good on an overdue debt restores a borrower’s reputation and should boost his/her FICO® Score, right?  Unfortunately that suggestion is more sentimental than logical. Perhaps that’s why it doesn’t apply to FICO Scores.

The fact is, paying off an account in collection neither increases nor decreases the borrower’s FICO® credit score, in and of itself. That may seem surprising until one remembers what FICO® Scores are designed to do.  Classic FICO Scores rank-order consumers based on the likelihood they will fall at least 90 days late repaying any current credit obligation within the next 24 months.  The single most predictive risk factor for FICO Scores is the presence on the credit report of a recent serious delinquency. 

Perhaps that’s because people are creatures of habit. When we stumble once, we are statistically much more likely to stumble again.

So even though a consumer pays off an account in collection, the fact remains that a collection was reported.  That’s the clincher for the borrower’s FICO® Score.  There are plenty of good reasons for paying off an old collection account, but a guaranteed or immediate improvement in one's FICO Score is not one of them.

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