Is it true that paying a collection account resulting in a 'paid collection' entry will lower your score 5 points?

Answer 1

If you are paying off an old collection, yes, this will lower your FICO score, and possibly by much more than 5 points, depening on the age of the collection you are paying off. The reason for this is because the "date of last activity", a factor in the credit scoring process, becomes current when you pay off a collection. A collection that has not been active in 6 years will have very little effect on your FICO score - maybe 5 - 10 points at most. However, when you pay it off, that collection now reports a current activity date, and although it is a zero balance, the fact that the collection is now recent will far outweigh the effect of your paying it off, possibly by as much as 50 points, even more. This is why we tell people to NEVER pay off old collections and P&Ls before you search for home or car loans. Pay those off at CLOSING (as you will likely have to), that way, the hit won't effect your FICO until after you have closed. Hope this helps!