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Who's right?

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Anonymous
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Who's right?

My husband & I are currently in the process of trying to clean up our credit in order to qualify for a USDA loan on a home.  We are both about 25 points away from their "qualifying" score of 620, but would obviously like to improve our scores more than that.

 

We have many medical bills that went into collections due to a chronic illness I have, so those have most adversely affected our credit.  Our only debt is one car loan, one revolving account with a furniture store with a balance of $900 and a limit of $3000 (which we are working to pay in full), and our student loans.  My husband has $20,000 in loans, and I have about $26,000.  We also only have one other credit card with a limit of $500 that has a zero balance. 

 

The first mortgage officer told us to pay down our car & pay off the furniture and that should do the trick.  The second told us to first pay off old collections and THEN pay down debt, but from what I'm reading, paying old collections can actually hurt your credit.  Who is "right" here?  I obviously want to pay off collections, but not at the detriment of my already not-so-great credit, and not to push us even further away from our dream of finally owning a home.  Smiley Sad 

 

Also, how badly are our student loans affecting our credit?  They are currently deferred, but are we better off paying those down, too, before we go back to try again?

 

Help!

Message 1 of 3
2 REPLIES 2
amh783
New Contributor

Re: Who's right?

I believe that most cases (not all) require you to pay any outstanding collections prior to applying for a mortgage or closing on a mortgage, so IMO (and my experience) I would do that first. I paid an outstanding collection and, once it updated, actually boosted my score quite a bit. Not sure if that's the case for every scenario though.

I don't think student loans are looked any differently than any other installment debt, so I don't imagine them being a problem.

I'd pay the collections, pay the $900 furniture debt, and then work on paying down all other debt.


Starting Score: April 2011: EQ 606 TU 585 EX FAKO 574
Current Score: Dec 2012: EQ 738 TU 740
Goal Score: 800


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Message 2 of 3
RW771
Frequent Contributor

Re: Who's right?

I'd check with your lender and see whether they require all collections be paid at the time of approval. I know my lender did, so I made sure that I didn't have any before applying.

 

If you do pay them, I'd definitely offer a PFD first. This would definitely help you if the whole negative TL could be removed instead of showing as "paid" or "settled for less than full balance". A paid collection weighs the same as an unpaid one, so paying it or not paying it is the sticky part. I've heard of some people's scores going up after paying a collection, and some people's drop, while others stay the same. My collections were older, so I wasn't sure how much they hurt me initially, but know my score improved quite a bit by having them deleted.

 

If after offering PFD's and the CA's won't agree to them, I'd pay them and send GW letters. I was successfully able to have most of the collections that were paid completely removed off of my CR's via GW letters. The trick is to personalize them to meet your situation and keep at it. Just because you don't hear anything the first time, don't give up! It took me sending several to some of the companies and following up with a phone call.

 

Good luck to you! It can be done...I went from a 577 (EX-lender pull) back in June to a 682 (EX-lender pull) at the end of October by just having old collections deleted and 2 lates removed from one of my department store cards!

05/31/2013 672 EQ (Fico), 03/08/2012 697 TU (Fico)

Closed on my first home 12/07/11! Officially a homeowner, thanks to this forum!!!

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