The Effect of Paid on a Credit Score

Collection accounts, which are unpaid bills that creditors referr to third-party recovery or collection agencies, have significant affects on your credit profile. These items stay on your credit report for seven years, damaging your chances of getting credit cards or loans. In addition, collection accounts reduce your credit score -- the three-digit number firms use when deciding whether to approve you for credit. You should consider this score when paying off collection accounts.

Background

When you pay off a collection account, it does not immediately drop off your credit report. Instead, your creditor will report the balance as "paid" to the credit bureaus, which will add "paid" notations stating that you fulfilled your obligations to those creditors. Although you no longer owe the balance, the paid-off collection account will stay on your credit report until its scheduled expiration date -- seven years after it first appeared on your report.

Your FICO Score Won't Rise

Paying off collection accounts will not raise your credit score, according to an article from the Fair Isaac Corp., the Minnesota-based company that developed the FICO scoring programs that the three major consumer bureaus use to calculate credit ratings. This is because the FICO algorithm measures two things on collection accounts: the presence of such an account on your credit report and the time it first appeared on your credit record.

Your FICO Score Won't Drop, Either

Although some people believe paying off an old collection account will cause your credit score to plunge, Fair Isaac states that is not the case. This is because the FICO program does not consider a collection account's payment status, so paying off an old past-due bill will not lower your credit rating.

Considerations

Even though paying off an collection account won't raise your credit score, it is still a wise decision. This is because, in addition to your FICO score, many lenders and employers look at the information on your credit report. Companies view paid-off collection accounts as better than those left unpaid, and may be more likely to give you access to credit if you have taken care of your debt obligations. In addition, paying old bills will get collection agents to stop contacting you.