Have you set a goal to improve your credit scores? Perhaps you want to apply for a mortgage or purchase a new vehicle in the not-so-distant future. Whatever the motivation, the decision to work toward improving your credit scores is always a smart move.
Unfortunately, working to improve your credit scores is not necessarily an easy goal to achieve. Many people simply do not know where to begin. You might, for example, believe that paying off or settling outstanding collection accounts is the best place to start your credit improvement journey. Yet, although paying/settling legitimate debt is seldom a bad idea, doing so does not automatically guarantee any credit score improvement.
Your Many Credit Scores
You actually have hundreds of different credit scores. There are different brands of credit scores such as FICO and VantageScore. Among these brands there are different versions of credit scoring models. (Think 1.0, 2.0, 3.0, etc.) Additionally, among these different brands and versions there may be semi-customized versions for use by specific types of lenders (i.e. mortgage adjusted scores, auto adjusted scores, bankcard adjusted scores, etc.).
The purpose of credit scoring models is to help lenders predict risk. Although they serve a similar purpose, different scoring models do not evaluate the information on your credit reports in the same way. As a result, an item appearing on your credit reports could impact your scores very differently depending on the credit score brand, version, and option is being used.
Because there are so many different credit scores, it is impossible to consistently answer any question which asks about the impact of a specific item or action upon your credit scores. You cannot, for example, give a universal answer to the question posed: “Will paying collection accounts raise my credit scores?” The answer will always be, “It depends.”
Collection Accounts and Mortgage Applications
Several newer versions of credit scoring models built by FICO and VantageScore do not consider collections that have a zero balance (paid or settled) even if they still appear on your credit reports. However, there are many older credit scoring models which still consider zero balance collections. In these older scoring models, it is the presence of the collection account which can hurt your credit scores, not the balance of the collection.
Why should you care about older credit scoring models, especially those which were created and released over a decade ago? The reason why these scoring models and the way those models evaluate your credit is still relevant is because many lenders still use them. This is especially true in the mortgage industry where the GSEs (Fannie Mae and Freddie Mac) mandate the use of a much older version of the FICO scoring model in mortgage applications.
Should You Pay Collection Accounts Anyway?
You don’t know what score version most of your lenders are using. But, if you believe your lender is using an older credit scoring model which will still consider paid collections in a negative manner, you may find yourself asking whether paying off those collections is even a good idea. If you are weighing those options here is some information to consider.
First, it may sound crazy but under some REALLY old credit scoring models, that may or may not still be commercially available, your credit scores could actually go down by paying off a collection. Due to a deficiency in some scoring systems the payment of an old debt could be considered a newer negative event. Therefore, if you are preparing to apply for a new loan you might want to think about waiting to pay or settle those old accounts until after closing. Also, if you have a collection that is about to age off of your credit reports and you still want to do the right thing and pay your debt, I’d let it age off first.
It is also worth noting that ignoring your collection accounts can be dangerous. For example, outstanding collection accounts can sometimes make it difficult to pass an employment screening. Another potential repercussion of unpaid collections is that the debt collector could choose to sue you if the statute of limitations to do so has not expired.
Better Day Consultanting, The fastest growing credit repair firm in the U.S. Call now: 833-522-0200 www.betterdayconsulting.com