Why Your Clients should NOT Pay Off That Collections Account

Running a Credit repair and Coaching company gives certain insight to some serious credit score misconceptions out there.  The one we see the most often is, “If I pay off my collection account, I will get a credit score increase”. 

So, should you pay off a collections account to increase your score?

 No. No. No!!!

 Really quick, let’s go over the main differences between a Charge off account and a collections account:

 A charge off account is typically an account that reported to the bureaus regularly, (think credit cards). These account have the opportunity of giving you positive credit. Making timely payments to these accounts will add points to your credit score. When you stop paying on these accounts, the company will call it a Charge off, and they basically have to ‘eat’ the amount you owed them. 

Now, a collections account is one that was never, ever, going to report anything positive to the bureaus (think a doctor’s bill). If you got a doctors bill, and you paid that doctors bill, nothing would have happened to your credit score, positive or negative. Life would just have kept going on as it were. But when you didn’t pay, they turned it into a collections account. When they couldn’t collect the money, the company most likely SOLD the debt (Often for pennies on the dollar) to a collections company. A collections company is a company that often buys unpaid debts from other companies, and spends their time going after the patrons for the money owed.

Here is the super kicker that many people do not know about. As far as a collections accounts go, the most important information for your credit score is the DLA (Date of Last Activity). Simply put, the newest/freshest collections accounts have the most negative impact on your score.

What does this mean? So let’s say you have a collections account from 2014 and another one from a couple months ago. The account that is making the biggest impact on your credit score is the one from a couple months ago. 

Ready for this??? Now, when you make a deal with the collections agency to pay on the account from 2014, that action refreshes the DLA and that 2014 collection becomes recent and the damage starts all over. Even if you pay it all off, the collection account does not get removed off your account. It stays there, all refreshed and ugly.

I am going quickly to hit on a topic called “Zombie Debt” here for a second. “Zombie debt” is a debt that keeps showing up on a person’s report, often after it’s been paid. Some of our clients have even paid the same collections several times before they seek professional help with us. There are many reasons why “Zombie Debt” occurs but focusing on this topic, it often happens because sometimes a collection agency will sell off a debt to another collection agency and each agency will then put that same debt on your report. This is the same debt, being repeatedly reported on one poor soul’s credit report. The negative item just won’t go away, or “die”. Hence, the super creative name.

Now, if you absolutely need to pay off a collections account, it is VERY important to negotiate a Letter of Deletion in return for payment. Collection companies do not like to do this, so often time’s the negotiations can get a wee bit shaky during the process. But, when you get this golden letter, you can take that directly to the credit bureaus and have that collection item permanently removed from your report, boosting up you credit score.

The good news is that the more often a collections account has been sold, the better chance you have of getting that collection item removed off the credit report, without paying the debt. There are laws to protect consumers and www.creditadvisorinc.com specializes in knowing the ins and outs of those laws.

Hopefully, this article cleared up a little of the confusion on credit scores and reporting. If you would like to know more about a credit score specific topic, feel free to send me a request at [email protected] or give me a call at 720-663-0592.