Can paying your bills lower your credit score?!

In today’s credit crunch economy, more and more people are learning the value of a good credit score. The problem is that most people’s views of credit and the credit scoring process are somewhat outdated. Most banks are currently using the scoring model that was released by FICO in 2008.

This model has a couple of “quirks.” One of these is the rather common occurrence of seeing a score decline after paying some types of debts. This usually happens in files that show aged collection activity. If a credit report has old collections and has good recent positive credit accounts, paying those old collection accounts will usually generate a quick drop in score.

Why does this happen?

"Many collection agencies will offer a “pay for delete” arrangement. This is an agreement between the debtor and the collection agency that if an item is paid, the collection agency will remove the listing from the credit report."

Although the FICO scoring algorithm is a closely guarded secret, most credit experts agree this drop in score has to do with the “Date of Last Activity” field. Making a payment can update this field making it seem as though the file has new negative activity. Thus creating the drop in score.

So, how can you avoid this?

Many collection agencies will offer a “pay for delete” arrangement. This is an agreement between the debtor and the collection agency that if an item is paid, the collection agency will remove the listing from the credit report.

Do not assume this will happen automatically and get it in writing before paying the debt!

Enjoy your good credit.