Minneapolis, MN: Sometimes life happens. Good people end up with bad credit. But for most, bad credit is fixable with a little time, effort, and knowledge. Credit decisions for just about anything, car loans, credit cards, home mortgage loans all depend on your credit score. We all know having a higher score means not only getting the credit, but at lower interest rates.
The biggest item people need to understand is that a huge portion of their credit score is based recent information versus old information. A 30-day late payment on a car loan from 5-years ago DOES show up on your credit report, but it has little impact compared to a 30-day late payment from last month.
Paying off old collections:
There really isn’t much you can do about late payments on your credit report, so an area that many people attempt to correct is any old unpaid collection accounts. In theory, paying off old collection accounts seems like a good way to improve your credit score. but mistakes that lower your score, especially temporarily are most often made here when attempting to improve your credit score.
Date of Last Activity:
Assume you have a 5-year old collection account. It is just two-years from falling off your credit report, and while collections are bad, because of its age, it is only having a small impact on your overall score. By paying it today, you move the date of last activity to a current date. Your credit report now “sees” this payment activity as current. You now have a “current” paid collection, versus an old unpaid collection. While moving a collection from unpaid to paid will help in the long run, it may hurt your score today.
Assume one the other hand you have a one-year old collection account. This is having a major effect on your credit score, and should be taken care of immediately.
Because of how the date of last activity algorithm works, when attempting to improve your credit score, always deal with the most recent negative accounts first.
In the long run, paying off old collection accounts is ALWAYS the best thing to do – but be aware that if you are looking to improve score for a purchase in the short-term, paying off old collection just might end up lowering your score before you see the long-term improvements you desire.