I’ve broken this blog into two parts, part one specifically on aging collections and part two aging charge offs due to the many differences in these two types of derogatory and how the dates affect the credit score differently. Part 1 we focused on aging collections, now let’s focus on aging charge offs. There is a big difference in aging the two, they even fall under different state and federal laws when governing collection and reporting rules and regulations. I’m not going to bore you with those details, however, this could be part of the reason there is so much contradiction on this exact subject. Matter of fact if you ask 10 so called experts on this exact subject you’ll probably get ten different responses and most all of ’em will likely be wrong. So what makes what I’m about to teach you different? I don’t know I’ll let you discern as I point out some basic facts about how a charge off can report depending on what stage the account is in, status or the process that the original creditor chose. Or refer those same experts to me and within about twenty minutes we will all likely be in agreement. This is my effort to educate you on important differences, which hopefully bring clarity going forward.
Why is this so important to know? There are many reason it’s important to properly age a charge off, one being to uncover the many violations and date manipulations the creditors do while reporting. But the other is, to properly diagnose what’s holding the score back and at what scale. Knowing these issues specifically will help greatly when expediting a plan. If I’m forced to settle an account due to a deadline or the failure to get deleted, then I need to know a few things. Does it benefit my score when doing so? Is it under statutes of limitation or is it about to fall off due to being 7yrs? As you’ll find out these are not easy questions to answer when looking at the file. Yes you might be fooled at the date the bureau provides when the account is scheduled to come off, however that particular date has little to do with how the age of the account is affecting the score. Paying off or settling a charged off debt can absolutely drop the credit score. However, depending on how the debt is reporting, the status or being handled by the original creditor it could also benefit the credit score. Hopefully I can detail out the factors to consider below.
What is a charge off? Charge off: is when a creditor deems s a debt unlikely to be paid under its original terms. It’s an accounting move to remove the asset off of their balance sheets. But that doesn’t mean the consumer doesn’t still owe it. Then if the original creditor collects the debt afterwards or sells it off it then becomes a receivable or an asset in that original creditor’s accounting. Simple as that. It’s an accounting principle and has nothing to do whether the customer still owes the debt or not. What does matter.
Has the original creditor sold the debt? Or do they still own it? This is very important when determining how to age the debt or how to handle. Here’s how to determine. See below.
Sold charged off debt: Many times the original creditor will sell off the charged off debt to a collection agency and when doing so the creditor is to update the account accordingly. Showing a zero balance and the status of the account should stop updating and reflect up to the date the account was sold. The important dates in aging this type of account, is still the first date of last delinquency and the date of last activity, which should be the sold date. It’s common to see many violations in this type of entry, most often with the entry still reporting a balance and or rolling the DOL (date of last activity). Settling this type of account would mean settling with the collection agency that now owns it. Keep in mind the collection agency is likely reporting this debt on the credit file as well and will result in an updated debt and consequently lowering 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. Creating an age conflict with the credit score and having a lasting damaging effect. Although the first date of last delinquency, still makes the most impact. The date of last activity will continue to play havoc on the credit score in spite of the great healer. “Time”.
If the account is a Charged off credit cards, it will make even a greater impact on the score, as opposed to a charged off installment loan. Due to the outstanding active balance on a charged off credit card, the credit score will include that charged off debt in the current utilization. In spite of how well current credit card balances are managed today, the old rolling credit card debt will affect these utilization percentages as if it was a current debt. (Read that part again if you didn’t get it.) This is an account that absolutely could help the credit score if settled or paid off. Note: Not to confuse issues, but many times the original creditor will stop rolling the activity of the account in spite of still owning it, and in this case It could drop the credit score by settling.
Consider settling a charge off: To summarize 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 . Then inn this case and even more so if it’s a charged off revolving account as opposed to an installment will the score benefit. Credit Firm Inc. has a program which can tell you exactly how many points that particular action could make in your credit score.
Paying off or settling a charged off debt: This might be a good place to interject this tad bit of information. Paying off an old debt or settling the account is the same result. As long as the creditor is reporting 0 balance due on the bureau. I do not care if it states on the comments “settle for less” or “settled in full” the score results will be exactly the same.
Every day were working with our clients and referral partners in regards to credit, deadlines, and budgets. There is no one size fits all. However this knowledge and then the ability to simulate and test actions allows us to put together a very detailed plan custom fit to that exact situation and it’s many variables.
I realize this blog is but a small effort to bring some clarity in such complex subject and especially one that has so much contradicting information. I spend tons of time on this subject alone when training our consultants, and testing and retraining. I think when consulting, advising and planning it’s by far one of the most important subjects. I also know from a repair point of view, when getting deletions it can be a melting pot of violations.
If you want to be sure when aging your personal derogatory. Call the offices for a free consultation, and we will customize a plan specifically for and about you.