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DONNA R | Is it true that when you pay off old collections it harms your credit score instead of helping it? |
or if you settle instead of paying in full it also harms your credit score. The reason I ask is because I want to buy a house with out having a co-signer and my credit is in bad shape right now but I want to pay some off but I've gotten mixed answers. Please help me someone. Thanks |
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Studly
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It will probably come as no surprise...but I'm going to disagree with most of the people here..
If you pay off a debt that is being reported negatively on your report it WILL HURT YOUR SCORE!
If you settle for a lesser amount it WILL HURT YOUR SCORE!
These responders need to do their research...start by taking a visit to http://www.myfico.com and go to their consumer information area. These are the folks that developed the FICO scoring system...so they would know, right?
Lets examine why these responders don't know what they are talking about.
Negative items on your credit report also contain a "reason code" that identifies why it's being listed as negative. As long as that code is there, the debt will continue to hurt your score.
You may think that a listing saying "settled for lesser amount" is the same as "paid in full" but your reason code says otherwise...and it will prevent your score from increasing.
Paying a debt also does NOT remove information about late payments, collections, or charge off's....all of which will continue to hurt your score.
Now the worst part! When a negative item goes on your report, it will cause your score to drop dramatically for the first couple of years. But as time goes by your score will actually improve. That is because as the debt ages, your credit score does not give it as much importance as a "new" debt.
When you pay off an old debt, that report is entered into your credit report, and this updates it to a "new activity" item. It's now no longer an old debt, and your credit score drops!
Therefore, the rumor you heard is true. Paying off a debt can actually hurt your score, not help it. This is why most intelligent and experienced mortgage lenders tell you that you must pay off your old debt to get their loan....but do it at the very last minute. Then get your mortgage before the reports are update and your score drops. The difference in your score will save you thousands of dollars.
Do your research folks! I've seen this happen over and over. Don't get suckered into the advice from the preachers who tell you to "pay your debts!"....you will be sorry.
NEVER pay off an old debt unless the creditor agrees IN WRITING to DELETE the item from your report. Simply showing it as paid does not help you a bit! |
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echo
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It will hurt either way unless you demand that they delete upon payment.
Whether you pay in full or get them to agree to a lesser amount, by paying an older collection account, the account will be updated to make it look like a newer negative than it actually is (updating is not reaging)
If you have already request validation and the collector had provided it. Proving the amount they are requesting is not an inflated amount, that they are licensed and/or bonded in your state if your state requires it and that they actually have the legal right to collect on the debt - then you might send them a request to agree to a lesser amount and that they will consider the lesser amount as "payment in full". Also request that they delete everything they have placed on your reports upon payment.
It's not unknown for a collector to illegally inflate the amount, to not be licensed/bonded if required and also to try to collect on a debt that they have no legal right to collect on.
That is why it is always best to request validation before starting to talk payment.
Without requesting that they agree, in writing, to the lesser amount as payment in full, a person may find the same collector, or another, trying to collect on the remaining portion AND in some instances - they try to collect on the full amount that was already paid (yes that does happen)
The amount you should request to pay would depend on - how old the debt is and if you are past your states collecting SOL.
If it's an older debt, you can probably request to pay a larger reduced amount.
If the debt is past your states collecting SOL, you do have a legal right to inform them that the debt is no longer collectible.
But if you are past the collecting SOL and still want to pay, you can request a greater reduced amount since the only way the collector could "legally" see any money on it is with your offer to pay.
Do not speak with them on the phone, do every thing in writing.
Never sign your name to anything you send to a collector, only print your initials or type your name.
Always send everything to a collector by certified mail return receipt.
Order your credit reports and make sure they are not reporting with violations. If they are, send disputes to the CRA's for the inaccurate information being reported.
Read the FCRA and the FDCPA
When they send you the agreement (with their signature on it) that they will take a lesser amount as payment in full and that they will delete - put that letter somewhere safe and keep it "forever" |
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ed
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If someone paid an old debt to you.....
Would you really give them a bad reference?
A debt unpaid is a bad risk.
An old debt paid, is considered a "slow pay", but paid in full or as agreed upon, (reduced amount).
Thunk! |
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bdancer222
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Settling old debt will not hurt your credit score. In fact, if you want a mortgage, they will insist you take care of negatives. So clearing up your credit is the first step.
Some people insist that paying restarts the reporting period. This is ABSOLUTELY NOT TRUE. Negatives cannot be re-aged. They can only be reported on your credit report for 7 years and 180 days.
People confuse the credit bureau reporting period with the statute of limitations (SOL). This varies from state to state and is the time your creditor can sue. Payment or even promise of payment can restart the SOL. |
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Cali-Gal
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Hi Donna:
Studly is absolutely correct. He is not the top contributor for the credit section of Yahoo answers for giving bad information. Also, Echo is giving good advice. These two people are right on the money everytime.
I work in the mortgage banking industry and have done so for 18 plus years. Many times I have seen applicants apply for a loan and have old collection items showing on their credit. I have seen where they paid the collection before closing on the loan, and the FICO score dropped and therefore disqualified them for that particular loan program. Our underwriters will always state that the collection be paid through closing and will make this a condition for approval. |
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SPIFIMAN1
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Any time you pay off or settle a old collection account it helps your credit.
If you settle, it will show as "settled for less then full amount" if you pay in full it will read "paid in full". Either way it will show a $0 balance.
What you need to take into consideration is how old are these accounts? If they are nearing the 7-year drop off date, why pay them? Just wait and they will drop off your credit on their own. If they are fairly new however, then you should pay/settle them. |
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mister ed
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totally false -- paying off old debts helps your credit and in now way will it hurt it!!! |
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Slappy
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Reconnecting with debts that have been written off, is both a good and bad thing.
Mostly bad!
These debtors, once they find you and collect current contact information will use it against you, to the fullest extent of the law - whatever laws the SOB's actually follow!
Before you can even blink or even offer to pay the debt with them, they will instantly hit your credit report with a negative mark, which does instant damage.
If your debt is still in collection status it can be a good thing if you settle with them - so long as you pay when agreed! However, before you make contact with them, be sure you know what you plan to do with the debt. If possible, be prepared to instantly settle with them. Dependig on how big the debt is, they may offer to settle for the original amount owed and waive all the late fees and penalties. They may even offer up to a 75% reduction if you can pay in full. Do what is best for you, they are already making millions.
they really dont care how much they get from a collection account you so long as they get something.
Be sure and request, no demand they send you a letter stating they intend to change the negative mark to a paid account so your credit can BEGIN to repair.
It's not an overnight process but if you watch it and take care of it - in time, you will begin to reap the benefits of doing things right.
Remember, with todays laws collection accounts and charge offs CAN follow you around for up to 11 years. Do you really want that?
Good luck! |
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jean D
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To find out specifically what you must do to raise your score, you can order your score report from all three national credit bureaus. In addition to your score<!--you'll get your credit report, an indication of how your score ranks nationally and an explanation of how you can boost your standing.
http://badcredits.awardspace.com/creditscore.htm
In order to improve your credit score, it's important to know where you stand currently. Despite all the media attention given to free credit reports-->you still have to pay to find out your credit score, the three-digit number ranging from 300 to 850 that is the key to your borrowing costs. |
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OC1999
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If you pay off an old collection it does not harm your score. But depending on how you do it may or may not help your score that much either.
If you just pay off the collection account in full, it will show as "Paid in Full" but still remains on your report. It will show as a 0 balance which is good, but since it is on your report it will still have a negative effect. Ideally what you need to do is offer to pay the account in full, IF they delete the collection account. Once it is paid and they delete it, it is like the collection never happened, which will improve your score. Be sure to have this agreement in writing from them before you send any money to them.
As for settling for a lesser amount. Just as if you pay it in full and don't have it removed it does nothing to really help your score. However, if someone manually reviews your report(which they probably will when you buy a house), a settlement could send up some negative flags. |
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Stephanie
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Never will paying off collections harm your credit. Once those collections are reflected on your credit, there is nothing you can do to make worse except not pay them.
Some banks will require you to pay off your collections in order to get a home loan, so if I was you, I would get a head start.
Settling is not going to harm your credit more than what it already is by having a collection. If you can settle, then do it. If your credit is that bad, I don't think you will be able to get a loan, especially right now. Keep in mind that having 20% ready for a downpayment will not hurt either.
It really is all up to what the guidelines are for the type of loan your loan officer recommends and also it will be up to the underwriter (the person who acts on the behalf of the bank and manually will accept or reject the loan. Sometimes they will ask for a letter from you explaining why your credit is so bad). So really it depends. I suggest you try to get a loan from a MORTGAGE company and not a BANK since banks tend stricter guidelines. |
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candy26
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Yes, you need to pay all debts in full. If you settle it lowers your credit score. Before you can finance a house they will make sure all debts are paid off including medical bills. I've worked in collections for 8 years and with mortgage companys. |
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piffingod
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I think that it wouldn't hurt it but it wouldn't immediately help it either. I've never heard of paying your bills hindering you in any way. |
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