(Christina) I am in the process of buying a house and we are closing in 3 weeks. My lender asked me to explain two negatives on my credit, one being an $88 medical bill from 2009 that I was unaware of. I did not realize this was for underwriting purposes only, so yesterday I called the collector to find out about the account, and paid it in full thinking it would help. My lender then told me this would “dramatically” impact my credit in a negative way. After reading about the “Fair Isaac” decision on no penalty for paying off a debt collection in full, I am doubting what my lender told me. With three weeks until closing, how quickly might this be reported to my credit, and what impact might it have on my closing? We have been approved for FHA and losing this house over paying an $88 debt will be crushing for us. Thank you.
Dear Christina:
You obviously understand a lot about credit scoring. Hopefully this response will give you the tips you need.
You are correct that Fair Isaac has indicated that they have tweaked the credit scoring formulas to ensure that paying off an old collection account will not hurt you. As the saying goes, the proof is in the pudding. I am still searching for that pudding.
Fair Isaac has also stated that the FICO 08 updates to scoring formulas ignore debts of less than $100. While we believe this to be mostly true, you will likely find that any consumer credit scoring product will still indicate that your collection account is affecting your scores negatively.
Your best bet is to address the account in a manner that will get the collection record removed. Either a full payment of $88 or a partial payment of anything less to settle the debt would likely settle the matter. However, you should make your payment contingent on the collection agency agreeing in writing to remove any negative reference to the debt on all credit bureau reports. This is often referred to as a “pay for deletion agreement.”
Despite what some collectors will say, there is absolutely no requirement that a collection account be reported to the credit bureaus. Many do not report them as it is completely voluntary. Also, since creditors must pay the credit bureaus to report, they may have no problem removing the negative report if that is your condition for them to be paid. Ultimately, they just want to be paid so that they may profit and close the account.
The debt itself should not have a substantial impact on your scores since it is:
- more than 3 years old
- less than $100
- originally a medical debt
Medical debts do not have as severe a negative impact on credit scores as luxury debts do.
Negotiating a written agreement to remove the negative reference on your credit reports is your best option. Since the debt is so low, it would be worth it to pay the full $88 so long as they agree to remove the negative reference.
Tags: collection, credit, medical, score
Thank you Kenneth, I obviously didn’t know enough not to pay the collection agency before securing a “pay for deletion” agreement. The debt has already been paid in full for $88. I thought I was doing the right thing when in fact I may lose the best deal on a beautiful house all for an $88 medical bill that I should have left in collections. I don’t know at this point how to entice them to either a.) not report it (they did tell me they were required by law) or b.) delete the record from my credit.
Dear Christina:
That’s interesting that they told you it was required by law for them to report it. Perhaps they could reference that law for us? We all know better!
The car loan I had with a major credit union was only reported to 2 out of the 3 major credit bureaus. It is completely voluntary whether a creditor chooses to report. Debt collectors only do so as a means for coercion to repay your debt.
Even if the debt has been repaid, it can sometimes be worth it to contact the collection agency to ask if they will voluntarily remove the debt. Be nice and remind them of your faithful payment. Perhaps a small tip will entice them?!! After all, debt buyers are just opportunists looking to profit–perhaps an extra $20 will motivate them. Just be sure to get something in writing that they will remove the debt.
If it does not work, then you haven’t lost anything.
As far as your prospective lender goes, ask them if they are really going to deny you a preferred rate due to an $88 bill that is supposed to be ignored by modern credit scoring formulas. It sounds like they are still subscribing to an old lender product, and not to a FICO 08 scoring version. Many lenders have not embraced the newer scoring models because their historical data from current clients can only be compared to older scoring models. You might get a better rate by finding a lender that does look at newer scoring models.
You have a 45-day window where you may apply to multiple mortgage lenders and have all inquiries count collectively as one single hard inquiry. The advantage is that you may search for a lender who is using the newer FICO scoring models where you may have a higher credit score. Most real estate professionals recommend that you apply with a minimum of three lenders prior to deciding on a mortgage product.
You may still be able to get the home. If you need more guidance, we are happy to review your credit report with you. It is just one part of our service to you. Good luck!