I’ve broken this blog into two parts with Part One focusing on Aging Collections. You can visit that post here. In Part Two, however, we will be concentrating on aging Charge-Offs. There are many differences between these two types of derogatory items and how they affect credit scores. There are also different state and federal laws that govern collections and charge-offs and the reporting rules and regulations for each. I won’t bore you with those details -however, this could be part of the reason there are so many contradictions regarding this exact subject.
Matter of fact, if you were to ask 10 “so-called experts” on this exact subject you would probably get ten different responses. And most all of them would likely be wrong! So what makes what I’m about to teach you different? Let me point out some basic facts about how a charge-off can be reported and then you can decide. Or, you can just refer those same experts to me and I can guarantee in about twenty minutes we’ll all likely be in agreement! Charge-Offs can report differently depending on what stage the account is in, status, or the process the Original Creditor chose to handle the account.
Why is this so important to know? First off, by properly aging a charge-off you are able to uncover any violations and date manipulations the creditors make while reporting. Secondly, you’ll be able to diagnose what is holding the score back and at what scale. Knowing these issues will greatly help in expediting a plan of action. For example, if I am forced to settle an account due to a deadline or failure to have it deleted, I must know a few things first.
Will it benefit your score to settle? Is it still under the statutes of limitations? Or has it been 7 years and it’s about to fall off your report?
As you are about to find out, these are not easy questions to answer by just looking at the file. You might just be fooled by the date the Bureau provides regarding when the account is scheduled to come off! That date, however, has little to do with how the age of the account is affecting the score. Can paying off or settling a charged off debt drop the credit score?Absolutely – depending on how the debt is reporting, its status, or how the Original Creditor is handling the account. Let me try and detail out some factors to consider below.
What is a Charge-Off? It’s basically an accounting move to have the asset removed off the Original Creditor’s balance sheets. When a creditor deems a debt unlikely to be paid under its original terms, they can report it as a Charge-Off. But, that does not mean that the consumer does not still owe the debt. If the Original Creditor collects the debt after the charge-off or sells it off, it then becomes a receivable or an asset in that Original Creditor’s accounting. Simple as that. It is an accounting principle and has nothing to do with whether or not the customer still owes the debt. So then what does matter?
Has the Original Creditor sold the debt or do they still own it? This is very important in determining how to handle or age the debt. So how do you determine this?
Sold Charged Off Debt: Many times the Original Creditor will sell off the charged off debt to a collection agency. After doing so, the creditor is to update the account accordingly. The report should reflect a zero balance and the status of the account should stop updating up to the date the account was sold. When aging these types of accounts, the most important dates are the date of last activity and first date of last delinquency. The date of last activity should be the sold date. However, it is common to see many violation in this type of entry – most often with the entry still reporting a balance and/or rolling the DLA (date of last activity). In order to settle this type of account, you would need to settle with the collection agency that now owns it. Keep in mind that the collection agency is likely reporting this debt on the credit file. So settling this debt will result in an updated debt and will consequently lower the credit score.
Charged Off debt still owned by the Original Creditor: These types of accounts will usually update the debt monthly and reflect an outstanding balance. Thus, creating an age conflict with the credit score resulting in a lasting damaging effect. With this account the first date of last delinquency still makes the most impact. The DLA will continue to play havoc on the credit score in spite of the great healer -Time.
If the account is a Charged Off credit card, this will make an even greater impact on the score as opposed to a charged off installment loan. This is due to the outstanding active balance on the credit card which will be included in the current utilization. Regardless of how well the current credit card balances are managed today, the old rolling credit card debt will continue to affect these utilization percentages as if it was a current debt. This type of account would greatly help the credit score if settled or paid off.
Note: Keep in mind that many times the Original Creditor will stop rolling the activity of the account in spite of still owning it. In this case, the credit score could drop by settling the account!
When to consider settling a Charge Off: Only consider settling a charged off debt if the Original Creditor still owns it and then determine if the status of the account is updating each month. If so, the credit score will benefit from settling the charged off debt – even more so if the account is revolving as opposed to an installment account. Interested in how a particular action could affect your credit score? Credit Firm, Inc. has a program that can tell you exactly how many points you’ll gain or lose on your score.
Paying off or Settling a Charged Off debt: This might be a good place to interject this bit of information – Paying off an old debt or settling the account will have the same result as long as the creditor is reporting a zero balance due to the Bureau. I do not care if it states on the comments “settled for less” or “settled in full”. The score results will be exactly the same!
Every day we work together with our clients and referral partners to meet their credit, budget, and deadline goals. There is never a “one-size-fits-all”. However, with this knowledge and our ability to simulate and test actions, we are able to put together a detailed and custom plan to fit each situation and its many variables.
This blog is but a small effort to bring some clarity to such a complex subject that has so much contradicting information. When training and testing our consultants, I spend most of our time on this subject alone. It is by far one of the most important subjects when consulting, advising, and planning. From a credit repair point of view, getting deletions can be a melting pot of violations.
If you want to make sure you are aging your personal derogatory correctly, call our offices for a free consultation. We will customize a plan specifically to suit your needs.-Dennis Hubbard
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