Will paying down card before applying for loan improve score ?

[Anonymous]

Hi Everyone,

I am thinking off applying for a home mortgage in the next 6 months.  My FIco score is: EF 674 and TU 687.  I have 3 paid collections and one very old open collection that I was told not to pay off as it would drop my score.  Credit history is 7 years old so not very long.  I have one Kohl's card with a $149 balance that I paid off yesterday. I also have a Visa card with $1000 limit and $480 balance.  I want to bring the balance down but I am afraid to make any drastic moved that may hurt my score. I was thinking of paying $450 at one time and leaving $30 on the card so that I can continue to show good payment history.  Would making a big one time payment like that hurt my score? Am I correct in thinking that it is a good idea to have one card with zero balance and one with a small balance rather then 2 cards with zero balance?  Also how fast does the score change once you get the balance down? Sorry for all the questions but I am new to this and really want to improve my score a little before actually applying for a mortgage. Any responses will be very much appreciated!

[haulingthescoreup]

Hi, welcome to the forums!

Yes, in almost all cases, scores will benefit with having all cards but one report $0, and having that one card report some token amount like $30. (For most people, having all cards report $0 results in a score drop.)

Here's the timing: most cards update the amount that shows on your statement, sending in this info on the statement date. (Not the due date, but the date that the statement appears.) This goes in that night.

Some cards report the balance as of the last business day of each month. This includes HSBC and Orchard bank (not store) cards, and US Bank cards. US Bank sends in the balance info that night, while HSBC/ Orchard often delays.

Once the info is sent to the credit bureaus, then you have to wait for them to post it. Experian posts immediately (that night or the next morning.) Equifax and TransUnion take anywhere from 3-4 days to a week, sometimes more.

Once the new balance hits each report, the score will change when someone (including you) pulls it. Scores exist in a potential form, I suppose you could call it. They are the result of whatever appears on your report when it is pull, generating at that moment.

As for how much it will help you, that depends on your individual reports. Look at your most recent FICO reports, on screen two. What are the negatives listed over on the left, in order? These are the factors that are keeping your score down, with the first-listed hurting the most. If "high utilization of revolving credit" is listed first or second, reducing reported balances should move your scores nicely. If it's listed lower down, or doesn't appear at all, you might not see much change. However, it might well help approval by your loan lender, as it will show that you have more money available to pay back the loan. Hope that helps!

[MarineVietVet]

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@Anonymous wrote:

Hi Everyone,

I am thinking off applying for a home mortgage in the next 6 months.  My FIco score is: EF 674 and TU 687.  I have 3 paid collections and one very old open collection that I was told not to pay off as it would drop my score.  Credit history is 7 years old so not very long.  I have one Kohl's card with a $149 balance that I paid off yesterday. I also have a Visa card with $1000 limit and $480 balance.  I want to bring the balance down but I am afraid to make any drastic moved that may hurt my score. I was thinking of paying $450 at one time and leaving $30 on the card so that I can continue to show good payment history.  Would making a big one time payment like that hurt my score? Am I correct in thinking that it is a good idea to have one card with zero balance and one with a small balance rather then 2 cards with zero balance?  Also how fast does the score change once you get the balance down? Sorry for all the questions but I am new to this and really want to improve my score a little before actually applying for a mortgage. Any responses will be very much appreciated!

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Welcome to myFICO.

Whoever told you this is not exactly 100% correct. (How's that for diplomacy?) A collection is scored the same whether paid or unpaid.

Do you remember the reasoning behind this advice about not paying old open collections? If the argument is that paying an older collection will make it look newer and therefore hurt your score that is not the case. Collections are scored from the date of assignment and not the date of last activity.

From a BK years ago to:
EX - 3/11 pulled by lender- 835, EQ - 2/11-816, TU - 2/11-782

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

[Anonymous]

Thank you for the helpful advice! 

High utilization of revolving credit is the second item listed on the left. I believe the collections was the top item listed. Sounds like paying down  the card  by $450 will help.  I am going to do that today!

The person that told me not to pay the old collection was the loan officer I consulted at my credit union. She said that because it is really old and less then $200 that I should leave it alone.  She said paying it may make it appear as a recent item which may lower the score.  She said they may ask for it to be payed at closing but didn't sound very worried about it.  Of course, this is the only  person that I have talked to so far so not sure if what she said is true or not.. 

[haulingthescoreup]

There's a common belief that paying a collection will re-age it, making it appear like a new collection.

Although the account will show new activity (updated DOLA), the date of assignment itself shouldn't change, and therefore the score shouldn't change.

Those with credit monitoring get alerts about the new activity, and that leads many to think that it has been re-aged, when it hasn't.

Pretty funny that a loan officer is advising you not to pay. A very pragmatic woman, I must say.

Here's a link from a thread where we were trying to figure out if this really happens, as opposed to common belief/ urban legend/ internet lore/ etc:

Settle or pay in full

It's your decision whether to pay it off. If you want to do so, for whatever reason (you owe it, you want it gone, etc.), I would recommend doing a PFD, pay for delete, where you cut a deal with the collection agency where in exchange for your payment, they will cease reporting it. Paid collections get reported and scored just like unpaid ones. Whatever you do, go into it with your eyes open.

[Anonymous]

Thanks! that is very interesting info. I am going to have to look into this before i make a decision.

As far as my credit card, I made a payment today and will now only have a $30 balance.  Is it ok to pay it down by about $5 a month from now on until it gets close to 0 and then charge another $30 on it and keep making payments?  I have a feeling this is probably a silly question, but I have to ask as I really need to do this right in order to not mess up my credit...

[JayRizzo]

Unfortunately, with credit cards, you have a minimum monthly payment, so paying $5 per month on a $30 balance over the next few months will not be acceptable.  BUT, if you know your Statement End Date as discussed in the thread, you will be able to use your card throughout the month and pay it just before your statement date while leaving a $5 balance -- that small balance will be reported.  Each month when you do this routine, you are:  1) Paying your account   2) Keeping utilization low on the reports for this particular account.

Note:  Don't forget you will be charged interest on that small balance that you're carrying over to the next month, unless you have a zero percent interest rate.

[haulingthescoreup]

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@Anonymous wrote:

Thanks! that is very interesting info. I am going to have to look into this before i make a decision.

As far as my credit card, I made a payment today and will now only have a $30 balance.  Is it ok to pay it down by about $5 a month from now on until it gets close to 0 and then charge another $30 on it and keep making payments?  I have a feeling this is probably a silly question, but I have to ask as I really need to do this right in order to not mess up my credit...

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You don't need to torture your balances. (I assume that's why you're asking about dragging it out 5 bucks at a time.

As long as one card reports some small balance, that's all you need for optimum scoring. Whichever card you let report, pay it off promptly so that you don't have to pay any interest.

Since it won't update again until the next statement drops, that $30 balance will continue to report even after you've paid it off. If you want to make that particular card (whichever it is) your "reporting card", you can use it as much as you like. Just pay off most of the balance 3-4 days before the next statement drops, let the remaining balance show up on your statement (and therefore your reports), and then pay off the balance before the due date.

btw, it's toe-curling easy to forget to make that second payment before the due date! Most CCC's aren't sleazy enough to report you to the credit bureaus as late if you miss the due date by a day or two, but they will gleefully charge you a late fee and probably increase your APR. Be sure to get in the habit of cleaning off that remaining balance once the statement drops.