Don't Wait to Pay Off a Collection Account

3 November 2008, Reviewed February 4, 2011

I am frequently asked whether, prior to applying for a mortgage, it is a good idea to pay off old collection accounts so they will no longer appear in the credit record. This turns out to be one of the trickier issues that arises in connection with credit scores, and I consulted with my credit guru, Catherine Coy, to make sure I had it right.

Borrowers should understand that paying off a collection account, like bringing a delinquent payment current, does not remove it from your credit record. As time passes, the impact on your credit score of an adverse item in the report gradually declines, because older information is less predictive of how good a credit risk you are than more recent information. But the adverse item does not disappear.

When a borrower pays an old collection item, not only does the item not disappear, but the payment converts it into a current item, which increases its weight in the credit score. As a result, paying an old item, unless it is also deleted from the record, reduces the credit score!

The moral is very clear. The time to pay off old debts is well before you expect to be in the market for a mortgage. If you wait until just before you enter the market, the genii who scores credit will penalize you as one who disregards obligations until they need additional credit.

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