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Kathy Godin's Blog

By Kathy Godin | Mortgage Broker
or Lender in Raleigh, NC

Pay Credit Cards or Collections First?

Raleigh – Pay credit cards or collections first common question of people who want to fix their credit score.  But another question needs an answer first.

Linda and Billy recently asked me that question.  My first question was why they want to improve their credit.  They wanted to buy a house.  I’m not a credit repair person; I’m a mortgage loan officer so my experience allows me to prepare people like Linda and Billy for a mortgage.  Here’s a recap of our conversation.

= What was their FICO credit score?  Billy’s score was the lower of the two so we focused on his score.  It was barely good enough to qualify for a mortgage.

= Were credit cards in default?  They weren’t.  They had high balances which hurt their scores.

Then I turned my focus to the collection.

= Was it a legitimate collection?  Yes it was.

= Were they making payments?  No they weren’t.

= How old was the collection?  Slightly over 3 years.  Once a collection ages (typically 18+ months), how you make payment is an issue.

= Did they have the money to pay off the collection?  They did.

Linda and Billy HAD to pay off the collection to qualify for a mortgage (some exceptions apply depending on size and age collections and type of mortgage).  The main issue was HOW.  Here’s how we worked it out:

= Don’t just pay it off.  Older collections hurt your credit less and less as they get older.  Just paying it off now would make it current in the eyes of FICO and lower their score.  They would not qualify for a mortgage with a lower score.

= Don’t dispute the collection.  Their collection was legitimate so a dispute would not remove it from their report.  A dispute would also prevent Linda and Billy from qualifying for a mortgage until dispute was settled.

= Offer to pay for deletion.  Collection agencies will sometimes agree to delete the collection from your credit reports when you pay in full.  This is best method since the collection disappears completely.  It will take some time.  If you have a house under contract, you may have to go to Plan B.

= Pay off collection at closing.  Since payment happens after the last time lender checks your credit score, it maintains your FICO score for purpose of qualifying on this house.

In Linda and Billy’s case, completely paying off the collection was required to qualify for a mortgage.  How to do it was the key.  Lowering balances on credit cards would help boost their credit score if this was needed.

So should Linda and Billy pay their credit cards or collection first?  Since their goal was to qualify for a mortgage, completely paying of the collection was a must.  They just had to be careful how they did it.  Credit cards did not need to be paid at all unless they needed a few points on their FICO score.

Source: FICO

Kathy Godin, Branch Manager & Award-Winning Loan Officer
Originally published: http://raleighmortgagegals.com
(919) 789-9888
Where people, not computer robots, answer the phone.
Proudly Serving All of North Carolina

Comments

By Jeff and Kaye Piggot,  Mon Feb 11 2013, 09:37
Great advice to pass along to buyers!
By Jennifer Ratcliff,  Mon Feb 11 2013, 09:45
Great post!
By Kathy Godin,  Mon Feb 11 2013, 14:37
Thank you Jeff and Jennifer for the kind comments.

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