Too often we hear real estate agents or loan officer tell a client to pay off some old collections, and then wonder why their credit score DROPPED! So I want to try and explain how sometimes doing the right thing, is not doing the right thing. Each creditors information or trade line reports to the credit report with a MOP Rating (Current manner of payment) with a 1 rating being good, and a 9 rating being the worst. All charged off and collection accounts are recorded as a 9 MOP rating. The moment an account in collections reaches a 9 rating, the dollar amount of that account no longer matters. Meaning a $10 collection and a $5000 collection are viewed the same in the eyes of the FICO scoring algorithm. The 2 most important factors now are paid/unpaid and the date of last activity or date of last update. When it comes to credit issues time helps heal things. Let me explain, if you have a $50 medical collection on the credit report that hasn't updated since 3 years ago, and you have a $50 medical collection that just reported last month. The newer collection that reported last month will have a much greater negative impact on the client’s credit report. Here is where it gets tricky and what normally causes the issues of scores dropping. When you just go through and pay off old collections, it will re-age or update the collection to the present. It is basically updating the date of last activity to now. Since it is a collection, it will still be rated as a 9 MOP rating. What this means is the FICO scoring algorithm doesn't differentiate that it was an old collection that was just updated. Rather it just sees it as a new MOP 9 rated account was added to the credit, hence dropping their scores because it thinks a new collection hit their report. Credit Guys has a few ways we can help your clients avoid this pitfall. We can attempt a pay for deletion on these accounts, meaning we can negotiate a settlement amount with the promised the collection will then be completely removed from the report. If we are unable to receive the previous outcome, we will negotiate a settlement amount where they will NOT update the date of last activity.
Saturday, 28 November 2015 05:57
Issues With Paying Off CollectionsWritten by Super User
Published in credit
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