You are driving down the road, radio is on, with good music playing until the station has to throw in a couple advertising segments to pay their bills. You switch stations and end up hearing even more advertising segments– like there is a secret agreement that the stations all run ads at the same time.
You switch again and you find yourself listening to an ad about cleaning up your credit. “Call now, we will help you clean your credit slate and get you on the path to a higher credit score. Maybe you have an account that is past due, and maybe this ad has peaked your interest.” You quickly jot down the phone number to call them on your coffee break.
Wait a minute, hold your horses, I have some news for you that just might interest you. We know collection companies get paid by collecting debts, so of course they encourage you to pay up and they also tell you that paying up will raise your credit score. Actually, it is usually the opposite; your score may actually drop significantly so let me explain why.
Collections are usually reported on a report from your lender as a “9” status and it will be worded you are in collection. On a consumer credit report, it will be worded you are in collection. This means the account has been written off from the original creditor and will be assigned or sold to a collection agency. At this time, it is irreversible unless this item totally disappears from the report.
Now having a poor credit reputation, so to speak, you are considered at risk to possibly default on another account. This is where the catch is: you pay the debt off but your score stays the same or more likely, drops substantially. Credit reports are used by lenders to calculate your credit risk.
I know, that is not what the ad you heard on the radio said, but the collection agency wants to get paid. Collection agencies will say almost anything to get you to pay. You should also know there is a statute of limitations for collections on governmental and non-governmental debt. It is different (by state) for collections and there is also a time limitation for how long items can stay on your report.
Here is where it gets even crazier: the date of last activity on a collection is updated to the date the account was paid off. If this debt is 4 years old, the date of last activity is 4 years old and the impact to the credit score is not much. If you pay it off today, the date of last activity gets moved forward to today’s date and in the FICO scoring model, this causes credit scores to go down.
A late payment on an account, or a collection showing up can be anywhere from a 30 to 100 point hit on average. A late payment of a mortgage is 100 to 200 points—the higher your score; the bigger the hit.
I am happy to discuss the best way to handle this, because you really want the collection company to have the negative item removed totally from your credit report. Collection agencies are counting on you NOT to know how the system works! OOPS now you do!
Give me a call. I am here to help you, something that gives me great pleasure in my work. I can be reached at 813-361-6350.