I have owned a Credit Repair/Restoration company, Credit-CPR, for almost 10 years now. It is amazing to me that as credit oriented that this country is that our school system doesn’t teach us a thing about in all our years of both public and private schooling. We generally don’t learn about credit until we get out there in the real world. Even those of us with great credit scores don’t seem to have a clue how that score is computed. I always encourage people to take on my job themselves but unfortunately without the proper direction they usually end up shooting themselves in the foot! I’ll share a very common mistake that I see that people make with you.
A woman called my office a month ago and wanted to know why her score dropped 20 points from 580 to 560 after she paid off $12,000 in collections. I looked at her report only to discover that the collection accounts she paid off were 4, 5, and 6+ years old. One of them was scheduled to come off her reports in just 6 months. I asked her how she came to the revelation that paying these old debts would improve her score? A broker that she spoke with said according to a computer program that he had that used a “what if” scenario told him the score should improve about 40 points. Instead it dropped 20! The one thing these “what if “scenarios do take into consideration is DLA!
What is DLA you might wonder? Well my friend, it is one of the most determining factors that contribute to that credit score that everyone is so concerned with yet knows very little about. DLA stands for Date of Last Activity. If you are 30 days late on something today, it could be for a $8,000 mortgage payment or a $10 credit card payment, you are 30 days late is how your credit score looks at it. Now your score will drop 100-150 points immediately! Once you catch up, you were still 30 days late last month and will only recover about 25 points. Your score will be harmed severely for about 6 months and then gradually recover for the next 36 months! So a 30 late on an $8,000 mortgage 5 years ago means nothing to your credit score whereas a 30 late on a $10 minimum payment today can devastate a otherwise healthy credit rating!
When it comes to collection accounts, a collection is a collection. It doesn’t matter that it’s for a medical procedure, a library book, or a $55,000 cell phone bill, yes I’ve seen one of them. They all affect your credit the same way as a late payment and when it occurred. Now, I’m not someone that will tell you not to pay your bills but I will tell you what will make your score go up or down. Pay attention, if you had a collection the occurred within the last 2 years, your best course of action is to pay it. Your score will improve slightly, maybe 10,20,30, or more points depending on how long ago it appeared and how much. Now, there is a big difference in when it occurred and when it appeared on your report. What you need to determine is when the last time that the ORIGINAL CREDITOR received a payment. That is the point of DLA. If the last payment occurred between 2-3 years ago, your credit score most likely won’t move at all because you are now making something current that has age to it. Now if the DLA was 3 years or more, by paying it off you will only damage your score and the older the item, the more damage you will do to your credit score.
When paying off a collection, you are not removing it from your report but just updating the status to a paid collection. A judgment, tax lien, charge-off and collection accounts are all negative entries on your credit report. Paying them off now makes them a paid judgment, paid tax lien, paid charge-off, and a paid collection. The damage was done when it was placed on your report and by paying them doesn’t undo the harm that it did to your score. It just updates the status on your report and your DLA will determine whether your score will improve or drop.
That will be the day when this country wakes up and just like Math and English; they start to teach us credit so we can have a better understanding of this mess before we get out there in the real world!