What you don’t know about collections can hurt your credit score.
Here are two facts most people don’t know:
1) The balance does not affect your credit score.
Whether you owe $100 or $10,000, it makes no difference in your credit score. A collection is a collection is a collection. Why?
Because a large balance might indicate a person has a high income; whereas, a small balance might indicate a person had a low credit card limit and therefore has a low income. Since it is illegal to consider income for credit scoring, the credit reporting agencies are barred from making a difference in score due to the balance.
This is important to know, because if you’re thinking your score will go up as you pay down the balance, you are in for a disappointment. The only way you will get your score to go up is by the collection aging older and older, until eventually it is off your report. (Unless you get it removed early.)
2) Paying off a collection will lower your credit score.
This is counter-intuitive and unfair. Nevertheless, that is the way the system is set up. As per above, your score cannot go up by lowering your balance on a collection account. On top of that, when you make a payment it updates the “Date of Last Activity” (DLA) to current, and that reduces your score.
A lot of good people try to do the right thing by paying off an old collection account — and then they are penalized for it!
The Best Way to Handle a Collection Account
If your collection account is old, then let it age off.
If your collection account is medical or less than $2,000, then you will not be required to pay it off in order to get approved for a home loan.
If your collection account is large and/or the collector is contacting you for payment, then negotiate a settlement with the stipulation that it will be removed from your credit report when it has been paid in full as agreed.
If you receive notice of legal action, do not ignore it! Work out a settlement, or if necessary, go to the court hearing and explain your situation. If you blow off a court hearing, then you automatically lose by default, so that is the worst thing you could do.
There are reputable, licensed credit repair companies that can help you with negotiations and legal issues. I do not recommend attorneys or lawyers (especially if they advertise all over the Internet–those are usually the worst). I recommend credit repair specialists who have over 10 years’ experience, because, in my opinion, they work faster, better, efficiently, and get better results.
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