You know what one of the biggest misconceptions Loan Originators and borrowers have about credit improvement? That paying off collections will raise their credit scores.
That is because collection companies have done a great job over the years of convincing consumers of that. That is why many are actually surprised to learn that paying off collections will actually lower their credit scores.
Here is why…
If the account was sent to collections 3 years ago, the date of last activity is 3 years old and the impact to the credit score has significantly diminished.
However, once the account is paid off, the collection company updates the report to reflect that the account now has a $0 balance. This causes a big issue. By updating the account to reflect the new balance, that also updates the “DATE OF LAST ACTIVITY” to the date the account was paid off, in turn reducing the credit score.
To avoid this, LO’s and borrowers should be talking to and working with the creditor to negotiate to remove the collection once it is paid in full. This not only helps borrowers with poor credit score but the 640+ borrower that is shopping for conventional pricing.
Have a question about credit improvement? Feel free to contact Alan Hayon at 800-965-6405. Alan Hayon is a FICO® Professional who and has been helping Loan Originators and borrowers improve their credit since 2011. Prior to moving into credit repair, Alan Hayon was also a Loan Originator since 2001 giving him a unique expertise in credit repair as it relates to mortgage lending.
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