Updated: Jul 28, 2020
It’s Tax Season and a lot of you may be anticipating receiving a tax refund. Have you really considered what you’re going to do with that money yet? If you’re like most, your probably have been thinking about it for a few months. Maybe you want to splurge and buy yourself something great like a new flat screen television, use it for a down payment on a car or even use it to pay for a long-awaited vacation or something like that. Some of you may just want to put the money away in your savings, and that’s a great idea. Others of you just might be planning to put the money toward bills, and that’s a great idea too; you are the ones I am targeting here.
While paying down debt is a good use of your “extra” hard-earned dollars, we recommend that you think strategically about how you do it and what bills you put that money towards. Think about how you can make your money work for you – how you can use your money to save or even make you money. Paying down debt that incurs interest, like credit cards, loans, your mortgage, for example, is a great idea. The more money you pay now means you’ll accrue less interest over time which, depending on how quickly you pay down the debt, can result in a savings of hundreds and even thousands of dollars over the life of the debt. That’s the smart way to pay down debt.
Now, for those of you who want to improve your credit, and are planning on putting your tax refund toward paying off collection accounts because you believe it will improve your credit, I have some news for you… Paying collection accounts that are currently reporting on your credit report does not improve your credit score at all. In fact, making a payment on those debts can actually harm your credit by keeping your credit score lower for a longer period of time.
When an account is reported to the credit bureau, the account history, specifically the date of last activity, is reported as well. When a collection account is first reported to your credit score, it factors negatively into the calculation of your credit score causing your score to drop. As time goes by with no change to the date of last activity on that account, the negative impact caused by this account is lessened. After seven years, the data collector can no longer report the account and it drops off your credit report, having a positive impact on your credit score and your credit score increases – as long as there are no other issues negatively impacting your credit score.
If you’re like me – before I learned all of this - you’re asking, “Why wouldn’t making a payment on an account like this show that I am attempting to pay my debts and help to improve my credit score?” Here’s how… The fact that the collection account is appearing on your credit report itself has a negative impact on your credit score – regardless of whether you are making payments on the account or not. BUT, when you make a payment on that account, it “resets the clock” so-to-speak, each time you make a payment, and therefore extends the amount of time the account can be reported on your credit report. So now you must wait seven years from the updated date before the account will fall off your credit report. Therefore, making a payment on this type of account – even if you pay the collection off in one payment - will only prolong the length of time that the account appears on your credit report and it will have a negative impact on your credit score the entire time.
Having said that, I don’t want you to think that I’m suggesting that you should ignore the collection accounts and wait for them to fall off of your credit report – although that is an option - there are some things that can be done with collection accounts that can help to improve your credit score. Not many people know this, but most collection accounts appearing on credit reports are being reported with inaccurate information which is a violation of the law. Debt collectors get away with this because they know most people don’t know the laws and/or don’t know enough to spot the errors – and some people don’t even know what’s on their credit reports at all. So, one thing that can be done, for instance, is to challenge the inaccuracies with the debt collector. There are several other angles and approaches to take with debt collectors that can have a positive impact on your wallet and your credit score. When you successfully challenge these debt collectors using the right methods, it can cause the debt collector to stop collection activities and get the account deleted from your credit report which will help to improve your credit score and credit history, not to mention it could also result in not having to pay the debt at all. The key is knowing the laws that are intended to help the consumer and how to leverage those laws to affect a beneficial outcome.
If you’d like to learn more about how we can successfully challenge debt collectors on your behalf to potentially get that debt eliminated and erased from your credit reports and improve your credit score, contact us today for a free consultation.
Contact Boe Credit Consulting today to learn how you can have the exceptional credit you deserve.
About the Author
Jeff Boe is a graduate of National American University, a Board-Certified Credit Consultant and the President of Boe Credit Consulting. He has successfully rehabilitated his own credit profile and, since 2005, has been working with consumers to educate and help them with improving their own credit.
In 2018 he started Boe Credit Consulting in order to help even more people improve their literacy as it relates to the credit system in the U.S. as-well-as to improve their credit reports and scores so they can be free to realize their financial goals.
Boe Credit Consulting specializes in helping credit-challenged consumers improve their credit reports and scores so that they can achieve their financial goals.
For more information, visit www.BoeCredit.com
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