When it comes to collections, and more importantly paying past collections, there are two common myths that consumers have. The first is that paying a collection will remove it from your credit report. It would be great if that were the case but unfortunately that is not how the FICO system works. Paying a collection will just have the account updated to a zero balance, but will not do anything for you as far as removing the collection from your report. Collections can stay on your report for 7 years from the date of first delinquency.
The second most common myth I hear about collections is the idea that paying a collection will somehow drastically improve your FICO score. If you understand the purpose of the FICO scoring system, which is to predict the statistical chance of consumer being 90 days late or more in the next two years, you will understand how this belief is flawed. If the purpose of the FICO score were to predict the statistical chance of a consumer paying a collection then yes, paying that collection would be fantastic advice for credit score improvement. In most cases paying a collection will have a neutral to slightly positive effect on your FICO score.
I am not saying don’t pay your collections if you have them, I just want you to know what to expect by doing so. There are several reasons for paying your collections, just understand that if you are hoping for a large score improvement or that the item will be removed from your credit report you are greatly mistaken.
The FICO score cares about the incident, meaning the fact that you had the collection in the first place, not the balance. After paying a collection the incident needs to be addressed. If you are able to get the collection removed from the credit report one way or another then you will see the improved credit score you were hoping for.
Obviously the best advice is to not let accounts get to the collection stage, but there may be circumstances that you cannot control which lead to collections. If you get a collection letter and have the ability to pay it, always ask the Collection Company if they will remove the incident from your report when you make the payment. This doesn’t always work, but it is worth a shot, if you are successful you will save your FICO score, which in this day in age is extremely important.