Timing is everything when it comes to handling collection accounts.
If your credit score is suffering and you have collection accounts with balances, they may seem like the first items to address for a quick boost. While paying these accounts off seems like the logical and intuitive solution, depending on your strategy, this could potentially hurt your score.
You’re probably more confused now than you were when you started reading the article. In fact, the exact words going through your head right now are probably something along the lines of, “how on earth could my credit score possibly drop when I pay off a collection account!?” This is a fair question and undoubtedly is causing confusion and frustration among many consumers.
In order to explain how paying a collection account can hurt your score, you need to understand how a collection affects your score in the first place. When a collection account first makes an appearance on your credit score, you can expect to lose anywhere between 10-50 points. The points lost due to a collection account should not be underestimated. Not only do they affect your overall score, they are also extremely debilitating when it comes to qualifying for financing options. As with most negative items on a credit report, the more recent the activity is, the more it will negatively impact your scores. Many collections will continue to report, month after month, until it is paid or settled. This means that your score is suffering a little more with each month that the collection exists on the report.
As time goes on, the creditor or collection agency may stop reporting the collection status to the credit bureaus. If this is the case and it has been a while since your collection has reported, you have likely gained some points back as the last reporting has become less recent. However, any type of activity with this account could trigger the collector or creditor to report again. Paying the collection off to a $0 balance is included in the type of activities that can trigger the reporting to start back up again. When this happens, regardless of the balance on the account, it will still register as a brand new collection, causing your score to drop.
Now you’re probably a little more frustrated than you were when you started reading. Now you’re thinking, “if I paid the collection off, why would it still be on my credit report in the first place!?”. To answer that question, a creditor or collection agency is legally allowed to report a collection for the entire amount of time that the Statute of Limitations states, even if it is reporting a $0 balance. This is because creditors and lenders want an accurate display of your payment history. If you’ve had a collection in the past, even though it is paid, creditors/lenders want to be able to see what your financial behaviors and history look like. Which if you think about it, is a fair and reasonable request. If you were loaning out money, you’d want as much information about the spending habits and payment behaviors of those that you were loaning money to. Access to this information would ultimately lead to the decision of whether or not you were willing to accept the risk.
Ultimately, the goal of this post is to illustrate that not everything about your credit score is as intuitive as it may seem, regardless of how logical it sounds. Paying off a collection account at the wrong time could be the difference in qualifying for a mortgage loan or not. However, when you work with a team of credit experts, you’ll be able to address accounts like this at the right time in order to improve your chances of qualification.