It just makes sense that if you pay a collection account, your credit score will increase. But the fact is, the balance on a closed account has no impact on your credit score, and paying off your collection can backfire.
Here’s why: every debt has a Statute of Limitations. The SOL is a time-frame of how long by law a creditor can collect a debt, and the time-frame varies based on the state you live in and where you acquired the debt.
More importantly, the Statute of Limitations is based on the Date of Last Activity (DOLA).
For credit cards and contract debt, most states give collection companies four years beyond the Date of Last Activity to collect. Mortgages in many states have a SOL of seven years.
The problem is, collection agencies have concealed the truth about the SOL and DOLA, so most consumers don’t realize that paying a collection account inadvertently extends the SOL time-frame, and gives your creditors more time to pursue you for unpaid debts.
For example, if you were unable to pay off your Citibank credit card and it went into collections three years ago, the Statute of Limitations would expire after one more year. However if you made a payment on that account today, you would unknowingly update your Date of Last Activity and reset the Statute of Limitations to another four years.
But wait that’s not all!
When you pay off a collection it also updates the “Date Reported” on your credit report.
The date reported is the date your account was flagged as late. This date is important because any negative account history typically remains on your credit report for a minimum of seven years after the “Date Reported”. (Tax liens, bankruptcies, and other government accounts can remain for 10 years.)
By Law creditors are not able to update the “Date Reported” section unless you are in a repayment situation and have missed a payment. In other words if you start paying off your collection and then miss a payment, collection agencies can update the “Date Reported” – which keeps a negative status on your credit report far longer.
If you want to raise your credit score, your goal should be to have the account deleted.
In order for a collection to report on your credit file, it has to be verifiable. The way to determine this is by requesting validation of the debt.
In many cases a collections firm or junk debt buyer will have no documentation on the account. If it’s not accurate and verifiable, the collection agency will have to remove it. This is often the case.
Removal of a collection account using Pay to Delete
Pay to Delete is where you offer to pay the amount in full (or at whatever amount you feel you can sell them on) in return for deleting the account.
You want a complete removal of the account from your credit report. Remember, having the collection account marked as “paid” is not going to help your credit rating.
Attempt to verbally work out an agreement on the phone, but don’t agree to any payments over the phone without possession of a written agreement.
If they are not receptive to removing the account, remind them of the nice profit they are about to make on this deal by accepting your offer.
Having this leverage can be powerful, especially when negotiating higher balances.
After receiving a signed, written acceptance of your offer from the collection agency, send a money order or cashier’s check for the amount that was agreed.
Once a collection is deleted, it will immediately increase your credit score. How much depends on several factors. The more recent the account, the more impact it has on your credit file. If you have $30 collection from last month and a $400 collection that’s 4 years old, the $30 collection is killing your credit score. The older collection is having very little impact on your score, even though the dollar amount is much greater.