Which One Affects Your Credit Score More? $500 worth of collections? Or $10,000 worth of collections?
Many people get hung up on thinking the dollar amount of their collections makes a difference in their credit score and how challenging it will be to clean up their credit – this is a trick question – there are multiple elements that would affect the answer.
First, let’s consider the most direct path. If I have only one collection on my credit for $10,000, from 14 months ago, and another person has only one collection, from 14 months ago, for $500 on their credit and all other elements of our credit are virtually identical, who’s credit score is higher?
The answer is that our credit scores should be essentially the same. The amount of the debt for each collection has absolutely no affect on our credit scores.
Now this might stop a number of people in their tracks to question that. I have heard many people talk about how their lender told them that the amount owed on a collection mattered. It does matter in the process of qualifying for a loan. The lender will only be able to accept a certain amount of collection debt for a given loan product. It also affects your debt to income ratios for determining how much you can borrow etc.
But when we are talking about your credit score, the dollar amount of the account has no affect on determining your credit score.
What if we changed things slightly? What if, in the example above, the $500 collection was from 5 months ago and the $10,000 collection was from 14 months ago? Who would have the better credit scores?
It may surprise you to know that the person with the $10,000 collection will have the better credit scores. Again, the balance does not affect the score. But, the age of a collection has a big affect on scores. The newer the collection is, the more it affects the score. A great way to look at this is to think that credit is like our body. When we get injured, we experience the most pain and debilitation when it happens. Then, as time goes by, the injury starts to heal and have less affect on our ability to function. Credit reacts much the same way. When an account first becomes a collection it hurts the most and then as time goes by, the affect decreases and the injury to your credit "heals".
Let’s change it up even more. Using the original example, let’s say that I have ten collections, all from fourteen months ago, totaling $10,000, and the other person has only one collection from fourteen months ago totaling $500. Who has the higher credit score?
In this case the higher score belongs to the other person with one collection. This is because the number of negative accounts matters. I effectively have ten injuries to my credit and the other person only has one.
But what if the other person, who only has one collection, got that collection last month and I got my ten collections 36 months ago? Who has the higher scores now?
Well now things are starting to get muddier. I have sustained ten injuries and the other person only one, but mine have been healing for three years and the other person’s just happened. It is likely that my scores are the better scores.
How about if I got my ten collections scattered over the last three years, with the most recent being five months ago? Would my scores still be the better ones?
Probably not. You see, the scoring algorithm considers patterns of behavior in scoring. Think about it. We all know life happens to all of us. Even the most prepared person can suffer from an event they were not totally prepared for. We would look at things like that as out of your control and generally not a reflection of any risky behavior or choices. On the other hand, if I made several poor choices or did nothing to prepare for possible circumstances, and had multiple failures, we would look at that very differently. We would see that as a result of risky behavior. In fact many of you might say failing to plan is planning to fail and I got what I deserved and I am a risk to lend to.
The scoring algorithm takes this into account. So the age of the account, the number of accounts and the frequency of occurrences all affect the score and all have to be weighed to determine our scores.
This is when it is common for people to bring up another common occurrence. What if, in the original example, The account says it is 14 months old, but it was really much older and had been sold to a different collection company and then another and another, to arrive at the most recent company fourteen months ago?
This is a little bit of an aside from the subject here, but it comes up almost every time I have this discussion, so I will touch on it briefly.
The age of an account is determined by when the original creditor last got a payment in good standing. Once the account went delinquent and was never brought current, the clock started ticking on the age of the account. It is a collection before a collection company ever gets it and no matter how many times it is sold, it is the same age.
I like to use a car analogy to easily illustrate this. If you buy a 2003 Chrysler Town and Country brand new off the lot and then trade it in to get a new car three years later, and it is then sold again and again, no matter how many times the vehicle was sold, it will always be a 2003 Chrysler Town and Country.
The same goes for collections. Although it is illegal for a collection company, or any company for that matter, to update the age of the collection (commonly known as the DLA or Date of Last Activity), it happens all the time and as a result can have a huge negative affect on your credit score.
That’s it for today. I hope you maybe learned something new from this and can see how quickly things can get complicated on your credit.
I welcome your comments and ask that you share this information with all your contacts on social media.
If you are finding you have some problems with your credit scores, a reputable credit restoration company like Heartland Credit Restoration is a great place to turn for help. We at Heartland Credit Restoration are all about helping people get positive control over their credit, and the more people that know this kind of information, the better.
If you are facing credit challenges, or you have a client that you are going to have to turn away due to credit challenges, then I encourage you to give me a call. We can look at how Heartland Credit Restoration might be able to help you turn things around and get that credit loan ready. There isn’t a better company you can go to for help.
I will look forward to talking to you and I hope you have a wonderfully blessed day!