Why Paying Off Your Collection Accounts Can Backfire On You
Ever had one of those moments when you shake your head and say:
“Why hasn’t anyone told me about this before?”
If you are struggling to pay off collection agencies in hopes of improving your credit score, it’s likely you are doing more harm than good.
Today I’ll reveal the pitfalls of paying off collections, and why collection agencies keep you blind to what’s really going on.
For starters, most people don’t know that paying off collections can actually prolong negative credit scores and extend those annoying collection calls.
You see, every debt has a Statute of Limitations (SOL). The SOL is a timeframe of how long by law a creditor can collect a debt, and the timeframe 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.
Trouble is, collection agencies have concealed the truth about the SOL and DOLA, so most consumers don’t realize that paying off a collection inadvertently extends the SOL timeframe, and gives your creditors more time to pursue you for unpaid debts.
For example, if you were unable to pay off your CHASE 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, there’s more.
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.
Bear in mind that your collection report contains a credit status for every line of credit you own.
If your account with CHASE for example is in good standing your credit status would be 1. However every time you make a late payment or default on a payment, your status level goes up a notch. So instead of 1 it becomes 2, 3, 4, all the way up to 9; at which point that account ends up in a collection.
Don’t be fooled into thinking that if you pay off your collection that your status will automatically drop down. Even if you pay off a collection completely, unless you obtain a “Pay to Delete” letter your account will remain with a 9 status.
If you have paid off a collection, be diligent. It’s up to you to make sure that negative items have been removed from your credit history.
I understand that every person’s situation is different, but there is light at the end of the tunnel . Hopefully this information will empower you to make the best choices for you.
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