Does Paying Off Collections And Judgments Help My Credit Score?

Posted October 1st, 2009 by BankruptcyLawyer

Do you have judgments and collections on your credit report?  Are you considering paying them off?  If so, you may be wondering whether paying off judgments and collections will help your credit score.  The answer depends on a number of factors – the most important is the “date last active” of your collections and judgments.  A popular myth is that your credit scores will increase by paying off all your collections and judgments.  In reality, a lot depends on when your collections and judgments were issued.  Let’s look at an example.

If you decide to pay-off an old collection account, the “date last active” will change.  The “date last active” is one of many factors used to calculate your credit score. Let’s assume that you have a collection from a past-due medical bill with a “last active” date of 06/02, and a $550 balance.  Since this is an old, inactive account, its effect on your credit score is very minimal.  It’s probably only lowering your score slightly.

Recently active credit accounts play a larger role in your total credit score than very old accounts – even if they are collection items or judgments.  If you decide to pay-off the old collection account, you will bring the “date last active” to the current month.  Your new balance will display $0 as the amount owed – however, since it is a recently active collection item, it may affect your score negatively.  In some cases, a recently active collection account (with a zero balance) is more harmful to your credit score than an old collection item with a past-due balance.

Fair Isaac is the company that manages credit reporting and scoring.  This company claims that adjustments have been made to credit scoring (starting in 2008) that allow you to pay an old debt without any negative movement in your credit score.  Fair Isaac says this is true for lump sum payments only – not for a series of payments over time.  Fair Isaac’s claim is very controversial, and it may not be true for all credit accounts.  Thus, you could pay-off an old collection or judgment, and your credit score may decline.  Consult your credit counselor, financial advisor or attorney before paying-off any past-due accounts with very old “last active” dates.  Depending on the circumstances, it may be better to wait for old collections and judgments to fall-off your credit report.