How come paying off “old debt” makes my score go down?

I hear this statement at least once a month.  Usually, right after a client has attempted to purchase a “big ticket” item such as a home and realized that they had a pesky bill from 5 years ago that in all likelihood (let’s face it the big 3 don’t have great track records) is not even their debt.  Their immediate reaction, and the reaction of most people is to just pay the debt and it’s gone, right?  WRONG!!!!!

Wrong?  You read me right, wrong!  Now it would make sense that if the client so chose they could pay the debt, theirs or not, the creditor (by this time I am certain it’s a collection company) has their funds and everybody’s happy.  But that would make sense, and this is of course credit we are speaking of.

I tell all of my clients and apparently don’t make it clear enough but the 3 big personal reporting agencies Experian, Equifax, and TransUnion are NOT “credit reporting agencies.  They are “information reporting” agencies.

Once people have a firm understanding of that, it becomes much easier to understand that things we do may seem “smart” or the “common sense” or the “right” thing to do, but may actually, according to the bureaus mathematical formulas, just be stupid.

So here is the likely outcome- you pay a $100, 5 year old debt that you knew nothing about.  Again, probably because it is not even your debt.  Now the scoring models used, which are all different versions of Fair Isaac Corporation, do not differentiate between payment on an old debt or a new report of a bad account.  And here’s a wake up call.  I know this is confusing, which is why I have a job… :) That 5 year old debt probably was having very little impact on your credit score.  Now it is being reported as a new “Paid” collection account, but a new collection account just the same.  You very likely dropped between 20-30 points.  Yikes! The horror.

Okay, so what could you have done differently?  First, find out if the debt is actually yours…you ding-dong.  Collection companies buy debt in bulk and one transposition of a number and you could end up with someone else’s debt.  Second, the collection company must by law provide you with a verification of debt, which means that they must provide the documentation showing that the account does in fact belong to you.  Yes, your credit report is in most cases nothing more than a list of allegations against you (you have probably noticed more negative than positive) and it is up to the creditor to show proof.  Ask for this proof.  If it does not exist, by law the creditor or collection company must legally and permanently remove it from your “information” file.

Second, okay so you find out it is yours.  It’s one of those deals where you moved and didn’t leave a forwarding address for the garbage company or in some cases an unpaid parking or moving violation ticket will show up on your “information” file.  Either way you forgot and now you want to make things right.  How to pay it without it becoming a newly reporting PAID collection?

Call and negotiate, but this is where it is sometimes best left to the professionals.

Ultimately the creditors want their money.  They have bought the debt for an average of approximately 10¢ on the $ and hope to get all but in all likelihood will settle for 30-50% of the debt.  They are still making a killing.

Ask for a deletion letter…in exchange for payment they will remove the entire trade line from your credit report. Do NOT let them tell you that they must keep it on for 7 years. This is not true.  An adverse account MAY stay for no longer than 7 years but can be removed at any time.  Get it in writing that they will remove the account from you “information report” upon receipt of payment.  DO NOT TAKE THEIR WORD FOR IT.  Again this is where a professional is of great assistance as we are not emotionally involved and we are aware of the traps that the collectors will use to tangle you in their web.

We can assist you with this.  Before making any payments let our team of experts give you a FREE credit analysis and a plan of action.