f you’ve ever watched a Tarantino film, you are obviously no stranger to plot twists or things not being quite what they seem. As a society, we love to be entertained and we love surprises. This should never be the case when it comes to our financial situation, however this is exactly what is happening in America today. Answer this question in your mind for me. When you pay off a collection, how does this affect your credit scores? I would be willing to bet that your answer expressed something to the effect of a positive impact on your scores. That’s the logical and practical answer. Pay off a debt and claim your cookie, right? The reality is, you couldn’t be more wrong.
Let’s say you landed a pretty sweet bonus at work. Let’s also say you had a few collections from a few years back, we were all young and dumb once, right? Now let’s say you decide to apply a portion of your bonus to making these older debts right in hopes to help improve your credit scores. If you pay these collections, your credit scores will decrease. You read that right, if you pay off a collection account, you are penalized for doing so. What’s happening behind the scenes is the date of last activity or DOA is being updated to today’s date. So a collection from three years ago suddenly looks like a brand new collection.
In the world of collections, there are only two variables that truly hold any weight with respect to your score; is it a positive or negative trade line and when was the last date the account was updated. Dollar amounts are not a variable of calculating credit scores unless we are talking about revolving accounts or credit cards. So why is no one talking about this? It’s simple, if the majority of the population knew that paying collections would hurt their credit scores, collection companies would find themselves in a world of hurt.
So what can you do to improve your credit scores without paying off your collections? Give us a call and we will walk through an in depth analysis of your situation and help formulate a game plan for you to improve your credit scores by making the smart plays.