Financial Counseling Certification Program (FiCEP) Practice Exam

What is the common misconception about paying off collections?

1. It guarantees an increase in credit score

2. It removes negative items immediately from the credit report

3. It has no impact on future credit applications

4. It prevents further collections on the same debt

The correct answer is: It removes negative items immediately from the credit report

The notion that paying off collections removes negative items immediately from the credit report is a common misconception. In reality, when a debt is sent to collections, it results in a negative mark on the individual's credit report. Although settling the debt can lead to a status change (such as "paid collection"), it does not erase the initial negative mark. Instead, the collection account will remain on the credit report for a specified period, typically seven years, even after the debt is settled. It's important for individuals to understand that while paying a collection account can be beneficial for future creditworthiness and may improve their chances of obtaining credit, it does not instantly clear their report of negative information. This distinction is crucial as consumers work to manage and improve their credit profiles.