There is an overwhelming amount of contradicting information about what to do and what not to do with your credit and credit score. And to make matters worse, they all seem to come from trusted sources. “Experts” who carelessly spew out the same general advice with no regard to specific situations. Every day I meet clients who have been misinformed and were diligently following the advice of the so-called expert. However, this only worsened their situation. Imagine a doctor prescribing every patient the same medication based on the phrase, “I don’t feel well.” The phrase, “My credit score is too low”, must be followed by specific what-and-why questions before it can be properly addressed.
Recently I had a client visit my office in a complete panic with tears streaming down her face. She and her husband had recently committed to having their home-built. To proceed with the construction, the builder insisted on a pre-approval letter from a lender and a cash deposit of ten thousand dollars. The builder projected the completion date of their home to be in the next four months and they needed to secure the mortgage for final closing. The client was at a middle score of 648 and the mortgage broker granted them pre-approval. However, the broker coupled it with life-changing advice. “While you are waiting on your house to be built, let’s try to get your credit score higher. Then I’ll be able to qualify you for better terms.” This sounds reasonable, right? Yeah, right up until the point the broker advised my client to start paying off old debt!
As soon as they paid off their old debt, it dropped their credit score into the 580’s! Now, thirty days before closing on their new home, they no longer qualify for a loan. So not only are their dreams about to be flushed down the toilet, but also that ten-thousand-dollar deposit!
If I have been able to keep your attention, then you are probably scratching your head and thinking, “the Mortgage Lender asked them to pay off old debt and now their score is LOWER!?” Yep, that’s right. Now pay special attention to this next part – it is super important. When paying off an older debt, the creditor will usually update the account’s date of last activity to the day you paid it off. It does not matter that the account is paid and showing a zero balance.
When it comes to collections, the score only sees a code that represents the account being a collection and the date of the debt.
The more recent the debt, the stronger it impacts the score. So, in conclusion, paying off a 4-year-old debt can absolutely drop the credit score. However, there are some exceptions to this.
In some instances, paying off an old negative debt will raise the credit scores. The question we then ask ourselves is which accounts should I settle? This is where the Mortgage Lender’s advice fell short. Determining which accounts to pay is tricky, I’ll touch on this a bit here but I plan to write a more elaborate blog on that subject later. For now, decide whether the derogatory reporting on your credit bureau is a collection agency or the original creditor. If it is the original creditor, do they still own the debt and are they reporting a balance? If so, are they updating the account history each month? Is it a revolving or installment account? If you can answer yes to the latter question, then the account will more than likely raise your score or at least it won’t affect it negatively. As for either a revolving or installment account, you’ll usually see a bigger impact on the score from a revolving account due to the old debt still affecting the current utilization. (Boy, that last part alone will make a good future blog!)
So now, all that free advice I’ve given you has led up to this sincere plug. Call our offices and set up a free consultation! We will advise you on what accounts to consider settling and depending on your timeline, which accounts we can get removed. We will also use our credit score simulator to show you exactly how it could affect your score including an estimate of how many points you could gain or lose. Pretty cool, right?! -Dennis Hubbard
“We’re in the business of changing lives.”