The Real Deal on Paying off Collections
Collection companies have done a great job over the years of convincing consumers that paying off collections will raise their credit scores. Many are actually surprised to learn that paying off collections will actually lower their credit scores. Collections are usually reported on the credit as a “9” status or collection account. This means the account has already been “written off” and assigned to collections by the creditor. Once an account is reported this way on the credit report, the damage to the credit score is irreversible, unless that item is removed completely from the report. If the account is paid off, the collection company reports that the account now has a $0 balance, but they do not usually delete the item off the report. The account has already become a collection, and the risk of the consumer defaulting on another account is already very high, due to that collection.
So their credit score will not go any higher if it is paid off, because paying off a collection after the fact, doesn’t lower the risk of defaulting in the future.
However, the DATE OF LAST ACTIVITY is updated to the date the account was paid off. So if that account was sent to collections 3 years ago, the date of last activity is 3 years old and the impact to the credit score is not as much. But if the consumer pays off that collection today, they just update the date of last activity to today’s date, sometimes causing the scores to go DOWN as a result.
Crazy isn’t it? Clients are trying to do the right thing and pay off collections, but their scores can be lower as a result.
- In some cases we are able to help clients work with collection companies to have their negative item removed completely from their report, if they pay it off. This will help their credit while satisfying the collection company. This is not a high percentage process.
- In other cases we can challenge the item based on FCRA laws to delete forever! This is the obvious favorite from a consumer’s perspective. The clients save more money , the immediate impact it can have raising ones credit score and creating more value to a lenders decision maker if the overall credit reports reveals less questionable negative items.
The difficult issue (lack of knowledge and unwillingness to accept reality) most clients have with no. 2 vs option no. 1, is that it takes a time due to the ACDV process and the lack of government control with the cra’s. The overall savings results are much greater for each client. This is a risk reward but highly effective if the client is not backed in corner with options to make a decision. Example an upcoming move or wants supersede needs.
We will need to reassure the client that real expectations are sustainable with realistic points of view. This can be difficult when one is living day to day and feels their options are limited.