Collection companies have done a great job over the years of convincing consumers that paying off collections will raise their credit scores. Many of our clients are quite surprised to learn that paying off collections will actually lower their credit scores.
Collections are usually reported on the credit as a “charge off” or “collection account”. This means the account has already been “written off” by the original creditor and assigned to collections. Once an account is reported this way on your credit report, the damage to your credit score is irreversible unless that item is removed completely from the report.
If the derogatory account is subsequently paid off, the collection company will report that the account now has a $0 balance as required but they will not delete the item off your credit. The reasoning is that account has already become a collection and the risk of the consumer defaulting on another account is very high so they typically, it’s left on your credit as a derogatory account.
Additional damage then occurs because the DATE OF LAST ACTIVITY for the trade line is updated on credit to the date the account was officially paid off. Therefore, if that account was sent to collections 3 years ago and the date of last activity is 3 years old the impact to your credit score has lessened over time but if you pay off that collection today then the collection company has to report it so they update the date of last activity to today’s date, almost always causing your credit scores to go DOWN as a result.
Crazy isn’t it? You are trying to do the right thing and pay off your collections but now your scores will be lower as a result. We help our clients understand the process so they can work with collection companies to have their negative items removed completely from their report. This will help credit while satisfying the collection company AND it will get you a better rate which is always nice!
Be sure to ask us how we can help with your credit or any aspect of the real estate financing process. CONTACT US today!
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