Collections - To pay or not to pay, FICO score and lending oh my!

Greetings RPC Nation! So I haven't blogged for a bit, its been busy saving the world one credit report at a time! Today we need to chat it up about collections and what do with them. How do they affect score and how do they affect your ability to obtain financing for a mortgage. First, I need to start with a statement: YOU SHOULD ALWAYS REPAY YOUR DEBTS - - -HOWEVER! First we have to talk collection and give a couple examples. Collection in regards to your FICO score, (remember FICO is the score that matters when its comes to lending, 90 of the top 100 lenders use a FICO score, www.myfico.com) if you have balances on your collections they are going to bring down your FICO score. If they are under $100 and are older than a year they are still a factor just not as much and each credit profile is different as to how much. The next thing we have to consider is getting a home loan / mortgage. Since the BURST OF THE BUBBLE we have seen underwriting guidelines go through some changes. In most situations and with a majority of lenders they want to see collection paid off with the exception of SOME medical collections. Total balances and age of collection accounts are a factor and vary from lender to lender. For example: you have a collection account from 2 years ago with a balance of $70. An underwriter may not care about it, or just wants proof its paid - meaning its not a score factor they just want you to pay it. Example 2 - you have a collection for $1,000 and its 4 years old. Unless you can prove its over 6 years old from dating with the original creditor you may have to pay that one. If its not aged correctly its going to factor into your FICO score and an underwriter and LO (loan officer) wants to see that paid. BUT JOHN, I'VE HEARD BY PAYING COLLECTIONS IT WILL BRING DOWN MY FICO SCORE!!! WHAT DO I DO? WHAT'S THE CORRECT INFORMATION? It's true and false and here is the FACTS! In the world of the FCRA (Fair Credit Reporting Act, www.ftc.gov) Dating is the key behind this and how it affects your score. This can get confusing so hang with me - In regards to your credit report - the aging of a collection is 7 years and six months from the date of first derogatory with the original creditor **** NOT DATE OF LAST ACTIVITY **** What can happen if you're not careful is when you pay a collection, it gets re-aged by the method the collection agency uses to report to the bureaus. Be clear with the collection agency when paying and also check your credit report 30-60 days after paying the collection, also be sure to always get a receipt and keep it. ****EXAMPLE**** you defaulted in March of 2008 with Wells Fargo, Midland Funding purchased that debt in May of 2011. What is the aging of that collection account in regards to when it will come off your credit? (remember above) It should come off 7.5 years from March of 2008 when you defaulted with Wells. Its getting the bureaus to recognize this dating that can get tricky, but it can be done and I do it everyday. Meaning, even though the collection is 2011 it is aged the same as Wells and will come off the same time if you get the bureaus to recognize it. So then the question comes, well if 2008 is the dating, do I need to pay that? Well, in our great state of Minnesota that I love we have a 6 year statute of limitations. If you're not in Minnie, check your state and how it works. After six years you don't have to pay, however that doesn't mean the creditor and collection agency has to stop collecting. It is their right to do so and still can try to obtain a judgment against you. I alway refer to my top consumer rights, FCRA / FDCPA (Fair Debt Collection Practices Act) attorneys for legal advice or send my clients to them when I'm unsure of a debt status. I suggest you do the same if you are handling this on your own. In trying to keep this short, check your credit at least twice a year. Save voicemails from collection agencies, open your mail and deal with it. If its something you can't do, then ask for help. I don't care if its mom and dad, a friend, me, whoever. Rates or still low, its a great time to buy and make your OWN economy better. If you have questions, or need help reach out to me. I'll look at your credit for free and tell you what I think. My mission is to help those that have gone through similar things to me and are ready to take action. Last but not least, if you do have a lot of collections, don't be afraid to consult with a bankruptcy attorney. My BK attorneys are so nice and very good at what they do, there is no shame if you have to file. These laws (FCRA, FDCPA, FCBA, FACTA, US Bankruptcy Laws) are in place to protect and help us. www.redphoenixco.com john@redphoenixco.com