By Terrence V. Johnson Sr., Executive Director

Did you know that paying a collection account can actually reduce your score? Here’s why: credit

scoring software reviews credit reports for each account’s date of last activity to determine the

impact it will have on the overall credit score. When payment is made on a collection account,

collection agencies update credit bureaus to reflect the account status as “Paid Collection”. When

this happens, the date of last activity becomes more recent. Since the guideline for credit scoring

software is the date of last activity, recent payment on a collection account damages the credit

score more severely. This method of credit scoring may seem unfair, but it is something that must

be worked around when trying to maximize your score. How is it possible to pay a collection and

maximize your score? The best way to handle this credit scoring dilemma is to contact the

collection agency and explain that you are willing to pay off the collection account under the

condition that the all reporting is withdrawn from credit bureaus. Request a letter from the

collector that explicitly states their agreement to delete the account upon receipt/clearance of

your payment. Although not all collection agencies will delete reporting, removing all references to

a collection account completely will increase your score and is certainly worth the involved effort.

Within the delinquent accounts on your credit report, there is a column called “Past Due”. Credit

score software penalizes you for keeping accounts past due, so Past Dues destroy a credit score.

If you see an amount in this column, pay the creditor the past due amount reported.

credit score when older than 24 months. Therefore, paying an older charge off or a lien will

neither help nor damage your credit score. Charge offs and liens within the past 24 months

severely damage your credit score. Paying the past due balance, in this case, is very important.

In fact, if you have both charged off accounts and collection accounts, but limited funds available,

pay the past due balances first, then pay collection agencies that agree to remove all references

to credit bureaus second.

Contact all creditors that report late payments on your credit and request a good faith adjustment

that removes the late payments reported on your account. Be persistent if they refuse to remove

the late payments at first, and remind them that you have been a good customer that would

deeply appreciate their help. Since most creditors receive calls within a call center, if the

representative refuses to make a courtesy adjustment on your account, call back and try again

with someone else. Persistence and politeness pays off in this scenario. If you are frustrated,

rude, and unclear with your request, you are making it very difficult for them to help you.

Make sure creditors report your credit limits to bureaus. When no limit is reported, credit scoring

software scores the account as though your current balance is “maxed-out”.

For example, if you know that you have a $10,000 limit on your credit card, make sure that the

limit appears on the credit report. Otherwise, your score will be damaged as severely as if you

were carrying a balance of the entire available credit. Credit scoring software likes to see you

carry credit card balances as close to zero as possible. If it is difficult for you to pay down your

balances, read the following guidelines to maximize your score as much as possible under the

circumstances:

• There are different degrees that scoring software can impact your score when carrying credit

card balances.

• Balances over 70% of your total credit limit on any card damages your score the most. The next

level is 50% of your balance, then 30% of your balance.

• In order to maximize your score without having to pay down your balances, evenly distribute

your credit card balances among all of your credit cards, rather than carry a large balance on one

credit card. For example, if you are carrying a $9000 balance on a credit card with a $10000 limit,

and you have two other credit cards with a $3000 and $5000 limit, transfer your balances so that

you have a $1500 balance on the $3000 limit card, a $2500 balance on the $5000 limit card and

a $5000 balance on the $10000 limit card. Evenly distributing your balances will maximize your

score.

Closing a credit card can hurt your credit score, since doing so effects your debt to available

credit ratio. For example, if you owe a total credit card debt of $10,000 and your total credit

available is $20,000, you are using 50% of your total credit. If you close a credit card with a

$5,000 credit limit, you will reduce your credit available to $15,000 and change your ratio to using

66% of your credit. There are caveats to this rule: if the account was opened within the past two

years or if you have over six credit cards. The magic number of credit card accounts to have in

order to maximize your score is between 3 and 5 (although having more will not significantly

damage your score). For example, if a card was opened within the past two years and you have

over six credit cards, you may close that account. If you have more than six department store

cards, close the newest accounts. Otherwise, do not close any at all.

If you have a short and limited credit history you can ask someone who is a primary account

holder to add you to their account as a joint account holder or an authorized user. When added,

the primary account holder’s credit card will appear on your credit report. Credit scoring software

will treat the added account as though it is your account and you will benefit from the low balance

and the long payment history for that account. It is important to remember that being an

authorized user is helpful for your credit score only if (1) the person is carrying debt below 10% of

the credit limit and (2) has had good payment history on the card for seven years or longer. The

longer the history, the better. Being an authorized user is potentially detrimental to your credit

score if, for example, the primary card holder carries a high balance on the card and has had it

less than five years.

15% of your credit score is determined by the age of the credit file. Fair Isaac’s credit scoring

software assumes people who have had credit for a longer time are at less risk of defaulting on

payments. Therefore, even if your old credit cards have horrible interest rates, closing those

cards will decrease the average length of time you’ve had credit. Use the old card at least once

every six months to avoid the account rating to change to “Inactive”. Keeping the card active is as

simple as pumping gas or purchasing groceries every few months, then paying the balance down.

An inactive account is ignored by Fair Isaac’s credit scoring software, so you won’t get the benefit

of the positive payment history and low balance that card may have. The one thing all credit

reports with scores over 800 have in common is a credit card that is twenty years old or older.

Hold onto those old cards trust me! Preparing credit is a slow and time consuming process.

Full knowledge of your credit profile and how it represents you to creditors and credit bureaus is

pivotal to full credit restoration success. Credit bureaus always advise individuals that they have a

right to dispute their own credit files, but when the rights of the Credit Bureaus slow you down;

you know where to ask for help.