Understanding FICO® Scoring

[Credit_Author]

New World-Short term answer is that paying it off can negatively affect the score because it is activity on a negative account but long term it will have a positive impact because it can never haunt you again.

[TheNewWorldMan]

Unfortunately, I simply don't have the cash reserves right now to put that to the test...I'm hoping by the fourth quarter I'm in a more favorable position.

[madriley]

"Paying off the debts that resulted in a collection, judgment, or tax lien won't remove it from your credit report, but it will reduce the damage it causes to your score. But be aware that paying off a collection, judgment, or tax lien will make it recently active, which could cause your score to drop in the short term."

Think about what is being said here.  If the recent activity date on a collection is 4 years ago, it hardly has any effect on your score.  However, from what I read above it looks like all FICO sees is the "Last Date of Activity."  Since FICO is just an algorithm, it seems to me that it would make absolutely no distinction between a 4 year old collection that you just recently paid, and a BRAND NEW collection.  If all it sees is that date, and the date is updated to the present, how could it be that the effect would be any different than a new collection?

[MercyMe]

So true.  I paid off an $892 charge off more than three years ago (on a loan that was 20 years old) that's still coming back to haunt me over and over and over again.  Everytime the bank reports the charge off  and the CRAs update, it appears as a recent charge off, my score drops and I receive an alert. To make matters worse, in some cases it appears as though the entire $10000 home improvement loan was charged off with a couple of CRAs.  I must have disputed this thing a dozen times, and it looks as though I will continue to have to, until 2010.  I'd have been better off just letting it drop off; and it doesn't help me to sleep better at night knowing that I did the right thing ... not when it knocks the tar out of my credit score every 6 months or so, and I have to begin disputing again. 

Sigh.

[TheNewWorldMan]

That's why they won't get one thin dime from me without a written commitment for PFD.

The system shouldn't be like that--a person should get rewarded, or at least not punished, for trying to make amends. But that's how the system works.

[sjt]

I thought they made revisions to the FICO scoring model so you will not be penalized for paying a collection or charge off account.

Can anyone confirm this.

[algorithmslave]

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sjt wrote:

I thought they made revisions to the FICO scoring model so you will not be penalized for paying a collection or charge off account.

Can anyone confirm this.

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I am not sure about any revisions to the FICO numerology model.....What I do know is in my case I had a charege-off unpaid account reporting late each month for the last three years....Thus the recent activity was current. I decided to pay this small debt off. Now we will see if this has any effect on my score, for the better. I really hope it does. 

[boblohr88]

I am not sure with Fico, but believe where Credit goes Fico goes. I found that going back and paying off charge offs or write offs, will impact you in a negative way as does Credit cpanies who say they will clean it up, so you can secure a higher score. I lost 35 points from Credit repair and paid off 8 charge offs equal to $9000, it dropped another 40 points. After investigating an attorney told me paying off charge offs will only activate the count again reflecting the bad credit score... I will have the other two charge offs paid off, once non credit score is high enough enough to take the drop, but still be credit worthy.

Sorry for long reply... 

Bob

100% Disabled Veteran....

[basballguy]

I think it varies.

If there is a charge off that's reporting against your revolving accounts still with a past due, then it's affecting your uitilization and thus if you pay it off, you take a hit on activity but you still help yourself with utilization. 

Since utilization > activity, i think it's a win.  But just for that case. 

[RobertEG]

From the confusion in what you have read, both here and elsewhere, I think the definitive answer is that there is no definitive answer.

I can opine all I want about what makes or doesnt make sense, or about what the FICO algorithm does with scoring of collections and COs, but absent any specific statement from brother Fair, nothing is definitive.

Being a risk of becoming delinquent analysis, it only makes sense to me that a collection or charge-off should be scored in impact based only on the adverse item that created its reporting.... the DOFD.  Later activity has nothing to do with that issue, and thus should not affect its impact regarding its adverse scoring.

However, others swear that both updating reporting and payment or non-payment have effect. Much of that may be due to overlooking other changes that occured in their report, but the anecdotal posts seem to indicate an effect.

In my opinion, the real benefit lies beyond simple scoring.  The presence of old, unpaid debt is absolutely a negative in any manual review of a consumer's credit report, and even after the adverse item has been excluded from one's CR, it may still be discovered by subsequent creditors via other means.

Looking at the bigger picture, outside of damage to the wallet, it is always better, in my opinion, to be able to answer No, I have no unpaid delinquent debt, regardless if its CR inclusion or exclusion.