November 15, 2021

Collections and Charge Offs

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Whenever someone goes 180 days late on any open account, it moves to a status called “charge off”.  This means they are now closing the account and the debt is being transitioned into a collection status.  It does not always mean there will be a separate collection account created, as some creditors choose to keep the collection process in house, however you will often see that same item listed as a separate line item causing a double whammy on your scores. 

The charge off itself is still an unpaid revolving or installment account so it impacts the overall utilization as well as the payment history.  Depending on the age of the charge off, often by settling or paying in full, it will boost the scores.  The reason for this is you are satisfying the payment obligation and lowering the utilization on all your credit.  The date of last activity also gets updated so it can backfire if the weight of the derogatory becomes heavier then the gain you receive.  When trying to improve scores, it is important to see if paying the item gives you the benefit of a score increase. 

If there is a collection associated with the charge off as a separate line item, then paying the item depending on the age, can sometimes cause the scores to drop.  This is because the bureaus update the date of last activity which can trigger the algorithms to be read as a brand new paid collection, rather than an aged unpaid collection.  In many scoring algorithms such as mortgage scores, a paid collection and unpaid collection hurt the scores the same amount but the newer the activity the more it pushes down on the scores.

Collections only hurt the score.  They fall in their own category as “other”.  The amount of the collection has nothing to do with the weight on the score.  A paid collection, a $10 collection, and a $10,000 collection will all impact the scores the same amount.  When a collection is paid off, the only change in the scoring is the date of last activity, and this will update to the date of last payment made.  If the collection is 3 years old, and it is paid today it will often cause a significant drop in the scores.  On occasion, collection agencies will do “pay for deletions” however it is not as common as you would think as it is against the law for them to do so.  It will also usually require that ALL debt in that collection agency is paid and must be paid in full.

So, before you spend a lot of money to “fix” your credit, make sure that money is being well spent.  The Fair Credit Reporting Act requires that these companies reporting have all of the customer’s information on both themselves and the debts 100% up to date, accurate, and verifiable.  However, since there is no one out there enforcing the laws, errors and inaccurate information is prevalent on people’s reports.  When this happens, we can go in on your behalf and leverage these laws to clean up and remove a lot of the derogatory information if it is not reported legally and accurately.  Let us help you reach the credit scores you deserve!