This is a question we received when we held our "Ask The Consumer Credit Attorney" webinar. This webinar featured guest speaker Bob Willis, attorney and founder of Credit Repair Resources. The question is: why does paying off a collection have the potential to lower a credit score?
If you pay off a collection, it creates a new Date of Last Activity or DLA. The DLA determines how recent the collection has been active. The more recent the activity on a collection, the higher the impact it has on the credit score. From a consumer viewpoint, they are likely to feel that they have just satisfied their debt and now they want an immediate positive reaction in their credit score.
However, from the creditor’s view, you have just satisfied an old, bad debt. Now they want to see how you manage existing and new debt for 6 months to a year before you see a positive reaction on your credit score. Of course, the effect and the timing will vary depending upon the individual circumstances of the situation, from the size of the debt to the existence of other credit.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at email@example.com.