Never Pay Collections?*
Never Pay Collections as a short-term strategy to improve your FICO®5 credit score
In the mortgage industry we are required to use FICO®5 and that is dictated by Fannie and Freddie. The version that we use to underwrite a mortgage in 2015 is FICO®5 with that version of the FICO® score if a borrower pays a collection that has a two year old reporting date and you make a payment, it changes the reporting date on that collection to today. Bringing the reporting date current will decrease your credit score every time (except one specific situation that we will talk about shortly) FICO®5 looks at the collection Like it just occurred.
In some of the newer versions of the FICO® scoring model(8&9) When collections are paid if will not count toward your credit score at all. I think that is a important improvement but we’re not quite there yet.
As of 2015, when old collections are paid, (even when the reporting date is current) a consumer’s credit score will go down initially for a month or two. Then it will start to improve slowly, PROVIDED nothing else is paid late and the revolving balances on other accounts are paid down.
The most important thing to remember is paying a collection will cause short-term pain for long-term gain except for one specific situation.
I found that if the collection is being reported recently (current month) and the balance is being reported as currently past due. If a consumer has that specific situation and they pay off the collection, then the next month their score will increase.
There are two caveats;
The collections are being reported in the current month.
The balance is being reported currently past due.
In that very specific situation, if you pay that collection off, a consumer’s credit score will improve the next month (PROVIDED nothing else is paid late and the revolving balances are paid down.)
This is a very specific example, in every other situation paying off a collection is going to hurt your score initially. As time goes by consumers scores will increase if they have good credit habits.
If you’re looking for other ways to improve your credit score please go to GetLoanReady.com you can get free videos and worksheets to increase your credit score from a more holistic perspective. Never Pay Collections
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