COLLECTIONS
One of the first things most consumers do when trying to better their credit, is to pay off collections, but does it really improve their scores? To keep things simple, the short answer is essentially NO; a paid collection is still a collection. Unfortunately, changing the status to PAID will most likely not improve your scores. Below are a few key points to help you understand why paying off collections isn’t the best route to take and how to properly deal with these types of items if your goal is to better your credit score.
The amount owed is not a factor.
The amount of debt owed to the collection agency is not taken into consideration when calculating your credit score. A collection with a $1,000 balance is virtually the same as a collection with a $0 balance. The credit bureaus focus on the fact that the item is a collection rather than if it has been paid or not.
Paying off a collection could potentially hurt your credit score.
Let’s say you have a collection with CIRCUIT CITY from 2017; by contacting the creditor to pay it off you are updating the date of last activity (DLA) from 2017 to 2023, which will most likely drop your score as the credit bureaus will classify the item as “recent” even though it’s from 5 years ago.
The collection agency promises to report the account as PAID.
The only way paying off a collection will have a positive impact on your credit report and score is if the collection agency agrees to remove the entire account from your file. NOT just report it as PAID, whether it was in full or settled for less than the amount owed. If the company is unwilling to provide a “deletion letter”, then paying it will most likely not have the positive impact you are hoping for.
If paying the collection off is not the answer, how can I get rid of it?
As a consumer, you essentially have three basic options when it comes to dealing with collections-
1. Wait 7 years for the collection to become obsolete, then submit a formal request directly with each reporting bureau to have it removed from your credit report.
2. Contact the creditor and effectively persuade them to provide a “deletion letter” (most creditors won’t provide one either because they can’t or don’t want to; due to their internal policies and regulations) then submit a formal request directly with each reporting bureau to have it removed from your credit report.
3. Submit a formal request directly to each reporting bureau following the guidelines of the Fair Credit Reporting Act to officially dispute and challenge the accuracy, legitimacy and validity of the details of each collection account. This process actively requires the bureaus to delete any inaccurate, incomplete or unverifiable data from your credit report.
We understand that increasing your scores as fast as possible is a priority and there are many cases where the lending institution will require you to pay off collections in order to approve you for a home loan since this decreases your overall debt; however, please keep in mind that it will most likely not improve your scores. As a matter of fact, there may be ways to remove these negative items potentially saving thousands of dollars which could go towards your down payment and closing costs. Please do not hesitate to contact us if you, your realtor or your lender have any questions or need further details. We are here to help!
