Paying Off Old Past Due Bills Without Hurting Your Credit Again

People sometimes ask how they can improve their credit if they have old collections on their credit record.

Well, the answer is NOT to simply pay them. Paying off a five year old collection can cause your credit score to drop by 100 points.

You say that makes no sense? Well, here's the logic of it: Collections are weighted by how old they are; when your last activity was. They are weighted heaviest for the first two years, then somewhat lighter from two years to five, then lighter still after five years. If you pay it off, it's still a derogatory notation, because after all, you were way past due on it. But now the date it gets marked with is TODAY, and now you've got an absolutely fresh collection on your credit record. In other words, it comes back to bite you just as hard as it ever did, for another two years, after which it'll still be worse than it was for another three. You pay off an old collection, and it will be five years before it hurts you as little as it did before you pay it off.

So what you do is get a promissory letter of deletion. This says that *if* you pay $X, they promise to issue a letter of deletion. You need this promise in writing. Call or write the company involved, and come to an arrangement that if you pay however many dollars you agree upon, they will give you a deletion letter. Tell them to send it to you at your current mailing address. Don't pay until you do have the promissory letter in your possession, lest your credit suffer the hit I discussed above. These things are old - it is better for your credit to simply leave them sit than to pay them off and bring the delinquency date to TODAY. Many creditors apparently do not understand this. Make sure you explain it to them. "Without your written promise to delete this account upon payment, I am better off not paying this." Because that is the truth.

Once you have the promissory letter in your possession, then pay the bill. Include a copy of the letter with the bill to remind them. They will wait until your payment clears. They should then issue an actual letter of deletion. This is on company letterhead, has a contact name and phone number and an authorized signature. It should be short and sweet, reference the account, and say "Please delete this account."

You then send copies of that letter to the credit reporting agencies (Experian, Equifax, and TransUnion) and get your account deleted. Once the account - and the negative reference - is deleted, it's like it never existed. It is only once the account is actually deleted that your credit will see any actual benefit. If you don't get to that point, paying off old bills maims your credit instead of improving it as most folks would think.

Now, if the company reneges on the deletion letter, you have the legal ability to sue them. That promissory letter is a legal contract, with offer, acceptance, and consideration, for a legal purpose, etcetera. Talk to a lawyer about the details, I'm just a loan officer who's helped people with this a few times.

This entire process does take a month or two, and it can take thirty days to show up on your credit after it's complete. There is a process called Rapid Re-Score which can accelerate it, but Rapid Re-Score should not be something you plan on using - it's expensive, and doesn't result in as good a score as doing it the normal way. Optimally, deletion letters are not something to try when you already have a mortgage loan in process; it's something to do before you apply. Trying to do this while you've got a loan in process is expensive, because you're going to blow your lock period and need to extend it, sure as gravity. Thirty days of extension for your loan lock is approximately half a percent of your loan amount, so on a $400,000 loan, that's $2000. Most collections are a lot smaller, and you may have to resign yourself to the hit on your credit in some instances, in which case you will probably be better off to have it paid off through escrow at funding, where the loan will be funded and recorded before paying off that old collection hits your credit score by being brought up to the present day. Otherwise, you could find your loan denied due to credit score dropping, and discover that you're not getting another one on anything like comparable terms. Maybe you are not getting another loan at all, because your score has dropped too much. Be careful, plan ahead, and take care of old collection accounts ahead of time.

Caveat Emptor

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