It seems every few days I get a call or an email question from a consumer about the FICO score impact of paying off or paying down a collection account. The prevailing opinion is that paying a collection somehow makes it look like a new collection and thus lowers your scores. This is a current myth based on a past truth. There was a time when paying a collection would lower your scores, but not any longer.
So in this episode of FICO myth busting, I went to the source and interviewed Ethan Dornhelm, Principal Scientist at FICO and a FICO score developer. I also wanted some clarity behind the decision to program FICO 08 to bypass certain low-dollar collections. As you may recall, FICO 08 bypasses a 3rd party collection with an original balance less than $100.
Regarding the myth that paying collections will lower your FICO scores, this is simply no longer true. “Unless the original assignment date, the date it went to collections is inadvertently updated, then a partial payment or payment in full on a 3rd party collection will not lower your FICO scores”, according to Dornhelm. “The FICO score is focused on the presence of the collection and how recently the collection occurred. This is true at all credit bureaus and across all generations of the FICO scoring models still commercially available.”
This is good news not only for consumers but also for collection agencies who might not have gotten paid by wary consumers who thought that making good on their past due debts would re-start the credit damage clock. The logic from people is why would I pay on a collection that’s three years old if by making a payment I’ll make it look brand new? Thankfully, this is not the case. So if you owe a collection agency money, either pay or settle with them, and don’t worry about your scores.
Regarding the choice to bypass low-dollar collections in FICO 08, Dornhelm continues: “This threshold (<$100) struck a balance between capturing a majority of nuisance collections while at the same time ensuring that the predictive power of the FICO score was not compromised.” This is great news for consumers who have seen final utility bills, library fines and other comical obligations render their FICO scores damaged. It doesn’t relieve you of your obligations to pay your bills on time but it does refine the model to only consider debts that are relevant.
John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.
John Ulzheimer Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on Credit.com News & Advice.
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John,
Thanks for update on the myth. It will be great teaching my workshop students the myth once again.
However, just to make sure, it will NOT hurt your scores unless,the original assesment date is updated.
Carlos Samaniego
http://www.CarlosSamaniego.com/blog
John
I was reading your recent Blog about paying an older collection item will not lower your FICO score and I think the key point is that “if the collection company reports it accurately it will not lower your FICO Score” I think this addresses the bigger issue of misrepresented information reported by collection companies such as a debt being charged off and submitted to collection by the original creditor in the past but reported as a new debt by the collector. That action is a clear violation for section 605.C.(1) of the FCRA but nobody holds the collection companies accountable so why would they report anything accurately ? Thoughts?
Running of Reporting Period
(1) In General. The 7-year period referred to in paragraphs (4) and (6)3 of subsection (a) shall begin, with respect to any delinquent account that is placed for collection (internally or by referral to a third party, whichever is earlier), charged to profit and loss, or subjected to any similar action, upon the expirations of the 180-day period beginning on the date of the commencement of the delinquency which immediately proceeded the collection activity, charge to profit and loss, or similar action.
Steve, you’re exactly right. If the collection agency reports an incorrect date then the FICO score could think that it’s a new collection. This isn’t common though. In fact, I think most collection agencies would disagree with you about the holding accountable comment. It’s the exact opposite. Collection agencies are under assault right now from law firms suing under the FDCPA. I do a lot of FDCPA expert witness work (http://www.creditexpertwitness.com/) and these guys are getting shaken down in many cases when they’ve done nothing wrong.
There are going to be over 8,500 consumer credit related lawsuits filed in 2009, most of them FDCPA and FCRA claims. This is easily a record compared to previous years. And, many CONSUMERS are filing multiple suits because they’ve hooked up with a law firm or lawyer who loves the cash flow generated by suing collection agencies even if they’ve done nothing wrong and they’ve caused no real damage.
What you’re referring to is called re-aging and it’s not legal because it causes a collection to remain on file longer than it’s allowed to under the FCRA. Re-aging does happen but it’s not as serious of a problem as some would have you to believe.
I can tell you from experience that most collection agencies are good companies with honest people who just want to do a good job. I’ve worked with some of the biggest, and smallest, and the ones that I’ve worked with all have solid procedures in place to prevent any violations of the FCRA, FDCPA or the state equivalent.
Some are problems and deserve the crackdown but most are not.
I work in the consumer finance arena and I see about 400 credit reports a month and can list several repeat offenders of “re-aging” accounts that are 7+ years old on a regular basis. I think the FTC needs to start implementing the fines allower for violations of FCRA against these companies and they would staighten up quickly or go out of business.
Care to share the list? In private communication of course. I’m at julzheimer@credit.com.
Just sent the top 3 I see almost daily.