Collectors may be Severely Damaging Your credit Why Paying off debt Collectors may be Severely Damaging Your credit www.LibertyCreditConsulting.com 978-6DELETE (978 633 5383)

Many consumers believe that paying off collections is the best way to improve credit In reality, paying off collections will almost always HURT your credit scores

Today we will focus on exactly what happens to your credit when a collection is paid off At the end of this webinar you will know several facts and insider secrets that you can use against collection companies to exercise your rights and win your disputes

Reason 1: Paying off a collection updates your SOL Every account you owe money on has a Statue of Limitations SOL This SOL determines how long a creditor can legally attempt to collect on that debt

The SOL varies based on the state you live in or the state you acquired the debt Each state has different time frames

Your SOL will also vary based on the account type Mortgages, judgments, and tax liens are a few accounts which have longer time frames Credit cards and other installment loans usually have shorter times that collectors can collect

Many states have a Statute of Limitations of 4 years on credit card and contract debt This means the collector can only collect for 4 years beyond the Date of Last Activity of that account Mortgages in many states have a SOL of 7 years where the bank can pursues you to collect on that debt

When a payment is made on a collection account the Date of Last Activity is updated to the date the payment was made, which extends the SOL

For example, let’s say you had a CHASE credit card that went into collections 3 years ago If the SOL was 4 years, that would mean you can only be pursued for 1 more year on that account But when you make a payment, you update the Date of Last Activity on that account, which extends the SOL another 4 years

If you make a partial or full payment to that collection company today, you reset the SOL to today when you made that payment The collector would have only been able to pursue you for 1 more year if you hadn't made that payment

By making a payment to a collector in this scenario, you would have just reset the SOL giving the collector 4 MORE years to legally pursue you, starting from the day you made the payment

When you make payments to a collection account, you give creditors 4 more years to collect This is one of the reasons making payments to collection accounts may severely damage your credit rating

Reason 2: Paying off a collection does not change the account “status”

If you have an account in good standing it reports as a “1” status on your credit reports For example, a paid as agreed Mortgage reports as an “M1” status, while a paid as agreed Revolving account reports as an “R1” status

When late payments occur, that “1” status changes based on how late the account is being paid The first late payment changes the status to “2” and as the account becomes further behind the numbers increase until the account ends up in a collection as a “9” status All collections report as a “9” status and severely damage your credit scores.

Your credit scores are a mathematical model designed to depict your risk of going 90 days late on an account in the future

When you have collections and “9” status accounts your risk is very high and your credit scores are much lower as a result When you pay off a collection, the account still remains a “9” status and will remain for 7 more years unless negotiated off of your credit file It is still looked at as a defaulted account, even if you pay it off

Your credit scores will not go up after paying a collection in full, because the collection “9” status still remains and it is still looked at as a defaulted account Paying off a collection will NOT raise your scores for this reason When dealing with collectors, you MUST negotiate to have the negative item removed to see any benefit to your credit rating

Reason 3: Paying off a collection will update your Date Reported Every account on your credit report has a particular time it can be reported for

The times these accounts can report vary based on what type of account they are Most negative accounts remain on your report for 7 years Tax liens, bankruptcies, and other government accounts can remain on the credit for 10 years IRS debts can remain indefinitely

The time starts from the date you went late, NOT your date of last payment like the Statute of Limitations we talked about earlier Many creditors will update this date when a collection is paid off, even though they are not supposed to by law

If you enter into a re-payment contract with a collector, and miss a payment, they can legally update this date on your reports

Let's assume you have a Capital One credit card which you started going late on 4 years ago The account is due to drop off in 7 years, so since it is 4 years old already it will drop off in 3 more years In many cases when you make a payment on this debt the collector updates this date to the date you made the payment

This change means that the account will now report onto your credit for much LONGER than it should Instead of dropping off in 3 years based on the prior example, the clock is reset and it will now remain for another 7 years

Paying off collections in many cases updates your account so collectors can keep the negative item on your credit report much longer than it should be

When you pay off a collection many items on your report are updated As you can see, most of them are not good and will severely damage your credit score

The only good thing that happens is the balance is reported as $0 if it is paid off Your scores benefit a little based on now having a $0 balance instead of an outstanding balance

This means your risk is still high, and your scores stay low Unfortunately, having a $0 balance does not outweigh having the Date of Last Activity updated, so your credit scores will go down, not up, because the bureaus see it as a recent collection and still a “9” collection status This means your risk is still high, and your scores stay low 28

The only way to improve credit is to negotiate with the collector to DELETE the negative item When the item is deleted, all the history is wiped out and the “9” status collection is gone for good

If you do want to pay off a collection, make sure you negotiate a “Pay to Delete” letter to have the item removed completely Otherwise, dispute and delete your negative items

Review your collection account activity thoroughly, and decide whether paying down a collection account will provide any benefit to your credit rating before committing to do so

Be ready for life’s greatest adventures! www.LibertyCreditConsulting.com 978-6DELETE (978 633 5383)