Congratulations, you’ve paid off an old collection and are on your credit repair journey to excellent credit. You’re doing the right thing, but you’re wondering why your credit score dropped. Well, you’re not alone, it’s part of the process, and your score will get better over time. The reason your score dropped after paying off debt is due to several factors, but let’s take a look at the primary cause in this situation first.
Credit Score Drop After Paying off an Old Collection
In this scenario, let’s say you paid an old collection that first reported to the credit bureaus four years ago, and it has not reported or updated since. The account has “aged” it has less of an impact on your credit score than when it first reported four years ago. But after you pay off the old collection, the collection company will report the updated information to the credit bureaus, which can lower your credit score. Remember, a collection that has been paid can remain on your credit report for up to 7 years from the date it first reported.
Benefits of Paying Old Collections
You’re probably wondering why you should pay off the old collection if it negatively affects your score. Depending on your overall credit context, some benefits come with paying that old collection off. Because multiple factors contribute to your overall score, you can never just look at one variable.
- Payment History Improves –When you pay off an old collection, you get points in the payment history portion of your credit score.
- Debt-to-Income Decreases – Another factor when determining your credit score is your debt-to-income ratio. When you eliminate a debt, you decrease your debt load debt-to-income ratio.
- No Outstanding Obligations – Although the collection is still on your report when lenders and creditors see you have no outstanding obligations, they are more willing to give you new credit.
A FICO study found that consumers with the highest credit scores (above 785) used, on average, only 7 percent of their available credit on their credit cards. While paying off your credit card debt is important, what matters more is on-time payments and your utilization rate. Considering this, clearing up debt as quickly as possible isn’t the key to an outstanding score.
The balance the is used to calculate your utilization rate is based on your last statement balance. So, if you charged $900 on a credit card with a $1,000 limit and pay it off the same month, FICO will consider it as a utilization rate of 90% – much higher than the recommended 7-10% rate.
Ready to Repair Your Credit?
Credit repair can be a complicated process if you’re not aware of all the variables that go into it. It can also be much a much easier process than you imagine. If ready to revive your credit and get on with life working with a credit repair company can expedite the process and save you money in the short and long term. Give us a call for a free consultation today.