There is so much contradiction in what to do and what not to do when it comes to credit and the credit score. And what makes it worst is what we deem as a trusted source, following the advice of the expert who carelessly spew out the same general advice all over specific situations. I see it every day, my clients misinformed and diligently following the advice of the expert, only to worsen their situation. Can you imagine a Doctor prescribing every patient the same prescription, based on the words “I don’t feel well?” The words “My credit score is too low” needs to be followed up with a very specific why and what before it can be properly addressed.
Recently I had a client come to me in tears, and panicked. They had committed to having their home built and in order to proceed the builder insisted on a preapproval letter from a lender, as well as a cash deposit of ten thousand dollars. The builder projected their home to be complete in about 4mons, at which time they would need to secure the mortgage for final closing. The client at the time was scoring a 648 middle score and the mortgage broker granted them the preapproval, but then coupled it with some life changing advice. “While you’re waiting on your house to be built” the mortgage broker said, “let’s try to get your credit score higher, and I’ll be able to qualify you for some better terms.” Sounds reasonable…. Yeah? Up until the broker advised the client to start paying off some old bad debt. This client following their mortgage lender’s advice and paid off the old debt , and consequently dropped their credit score to the 580s. Now thirty days before closing on their new home, they no longer qualify and not only are their dreams about to be flushed down the drain, but the ten thousand dollar deposit to the builder as well.
If I kept your attention and you’ve gotten this far into the blog, then you’re probably scratching your head thinking,” the Mortgage Lender asked them to pay off old debt and now their score is lower?” That’s right. What I’m about to explain to you is so important to know. When paying off an older debt the creditor will usually update the accounts date of last activity to the day you pay it off. It does not matter that the account is paid or balance is showing 0. When it comes to collections, the word “paid” and the account balance has no affect on the score. The score sees a code that represents a collection and the date of the debt is what determines how much it affects it. Obviously the more recent the debt the more it affects the score. So paying off a 4 yr. old debt updates the date to current and can and absolutely drop the credit score.
Not to confuse you, but there are some exceptions to this. There are some instances that paying off an old bad debts will raise the credit scores. The question is which ones to settle and pay and which not to? And this is where the Mortgage lender’s advice fell short . Determining which accounts to pay can be tricky. Ill touch on it here, but later I’ll post a more detailed blog on the subject.
First determine if the derogatory reporting on your credit bureau is a collection agency or the original creditor. If it’s the original creditor, then do they still own the debt and are reporting a balance? And if so are they updating the account history each month? Is it a revolving debt or installment? If you can answer yes to the latter questions then the account will more than likely raise score or at least not affect in a negative manner. As for the either a revolving or installment, you’ll usually see a bigger impact on the credit score from a revolving account as opposed to an installment, due to that old debt still affecting the current utilization ( that last part alone will also make a good future blog.)
All that free advice to lead 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 which not to. Well also run it through a simulator and be able to tell you exactly how much it will raise or affect the credit score. Pretty cool, but then depending on your timeline we will probably try to talk you out of settling anything and let us just get it removed.