One of those things that causes a big surprise to consumers is finding a collection on their credit report. Occasionally they are there because of simply ignoring a debt obligation. However more often than not, we see medical collections. These may show up due to ignoring a bill from the doctor’s office or some related service that we are sure our insurance will pay for. However, it is not uncommon for some procedures or billings to still be in review when the provider’s collection services start kicking in due to lack of prompt payment and get sent to collection.
A simple collection can drop a credit score 50-80 points immediately, even if a 25.00 collection, the size does not matter! And simply paying it may not increase the score, but often drop the score!!!!
Collection companies have done a great job over the years of convincing consumers that paying off collections will raise their credit scores. Many are actually surprised to learn that paying off collections will actually lower their credit scores.
Collections are usually reported on the credit as a “9” status or collection account. This means the account has already been “written off’ and assigned to collections by the creditor. Once an account is reported this way on the credit report, the damage to the credit score is irreversible, unless that item is removed completely from the report.
If the account is paid off, the collection company reports that the account now has a $0 balance, but they do not usually delete the item off the report. The account has already become a collection, and the risk of the consumer defaulting on another account is already very high, due to that collection.
So their credit score will not go any higher if it is paid off, because paying off a collection after the fact, doesn’t lower the risk of defaulting in the future. However, the DATE OF LAST ACTIVITY is updated to the date the account was paid off. So if that account was sent to collections 3 years ago, the date of last activity is 3 years old and the impact to the credit score is not as much. But if the consumer pays off that collection today, they just update the date of last activity to today’s date, sometimes causing the scores to go DOWN as a result.
Crazy isn’t it? Your clients are trying to do the right thing and pay off collections, but their scores can be lower as a result. Help your clients work with collection companies to have their negative item removed completely from their report, if they pay it off. This will help their credit while satisfying the collection company.
I recommend always trying to have “removed or deleted”. Corrected, or shown as paid will not recover those lost points on the FICO scores.
All the best,