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William J. Acres

Paying Old Collections Will Improve My Credit Score, Right??

Wednesday, December 26, 2012 - Article by: William J. Acres - LendUS - Message

I'm often asked by borrowers trying to qualify for a mortgage if paying off old debt will help their score increase enough to qualify.. Since most lenders approvals are based on credit scores as well as other factors, getting the credit score up is your first priority.. But oftentimes, borrowers make big mistakes by trying to tackle credit repair on their own, and here's why.. Credit scores are driven by the most recent data vs. old data.. So if you have a collection that shows up on your credit from last month, you will get a big decrease in your score.. If the collection on your credit report is 5 years old.. It will have little impact to your score since its 5 years old, and it's 2 years away from dropping off your credit report altogether... but this is where most people make the mistake.. In this scenario above.. You have a 5 year old collection, and you wish to make good on it.. So you contact the creditor and agree to pay the balance thinking that you will help raise your score since a paid collection is much better than an unpaid collection.. Right?? WRONG!!... When you pay that 5 year old collection, you just changed the "Date of Last Activity".. Remember when I said that credit scores are driven by the most "Recent" data?? By paying off a 5 year old collection, you in fact just renewed it... brought it current and made it new... instead of having a 5 year old collection, you have a brand new paid collection.. With credit reports, a collection is bad.. Whether it's paid or not has little to do with your score.. The fact that the account went to collections is what drives your score down.. This goes against all conventional thinking, but it's how credit reports decipher data.. Most professionals would have approached this collection company much differently.. First, they might not deal with it at all since its 5 years old, and they know it's not really affecting your credit score by much. But sometimes the client is persistent and they want to deal with all their old bad debt.. In this scenario, they would have negotiated a "payment in lieu of deletion"... meaning, the client will pay the collection, but only If you DELETE the collection from the credit report altogether.. Not show it paid, not show it settled.. But DELETE it permanently...

So how do you go about doing your own credit repair?? My best advice is, you don't!!.. Leave it up to the professionals, and contact a local credit restoration company.. There are a lot of Hacks out there, so do your due diligence and check with your local Better Business Bureau and look at the rating of the company.. Also contact your local government, and see if the company is in good standing.. Most states don't have license requirements for credit repair companies, so you really need to be sure the company your using is legitimate.. By using a qualified credit restoration company, you're putting your faith in these people to help improve your score permanently, not just a quick fix... and help you on your way to own that new home... I'm a Broker here in Scottsdale AZ and I only lend in Arizona. If you or someone you know is looking for financing options, feel free to contact me or pass along my information. 480-287-5714 WilliamAcres.com

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