Question: Have you ever wanted to know what the real difference is between a Collection, a Charge Off and a Profit & Loss on a credit report?
Answer: The quick answer is that there is a huge score impact difference between them. First off, you need to categorize a Charge Off and Profit & Loss (P&L) into the same group on a credit report where the difference is just mere accounting terminology. However, the difference between a collection and the other two can be enormous.
Let’s take a look out how accounts can be classified on a credit report. They either show as an “R” for “revolving”, “I” for “installment” and “O” for “other”. A collection is neither a revolving account nor an installment leaving the only choice left as “Other.” Balances are irrelevant on an “Other” account, so whether you owe $0 or 10K your score will not change. Rather, the weight of the account is based on the DLA (Date of Last Activity), the newer the date the more it weighs, which is why paying off your collections will usually lower your scores as it will renew your DLA.
Charge Offs and a P&L on the other hand are more likely (maybe 80% chance) to report as a revolving account. This changes the game because not only do the same rules of DLA apply, but now the balance also has an impact. Whenever you are maxed out on any revolving account good or bad it causes tremendous score reduction consequences. The mathematical dilemma then becomes what is worse, having a maxed out charge off/P&L, or settling on it only to renew your DLA? This is why you have you credit restoration friends at your beck and call!
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