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 often you will 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 they are satisfying the payment obligation and lowering the utilization on all their credit. The DLA (date of last activity) also gets updated so it can backfire if the weight of the derogatory becomes heavier then the gain they receive.
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, $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 DLA (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 cause a significant drop in the scores. On occasion, collection agencies will do PFD’s (pay for deletions) however it is not as common as you would think.
So, before you spend a lot of money to “fix” your credit by paying off collections, make sure that money is being well spent. The Fair Credit Reporting Act requires that these companies reporting have all of your information on both yourself and the debts. Everything needs to be 100% up to date, accurate, and verifiable. However, since there is no one out their enforcing the laws, errors and inaccurate information is prevalent on credit 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.
This is where working with a credit repair company like Paragon Credit Services can help. We can dispute the negative items for you and work on cleaning this information up.