Pay in full or settle?

[lorenzj4]

I have a collection I want to pay before I apply for a mortgage loan. The account is still listing in revolving accounts, and the balance is still  factored in to my overall debt, so paying it will actually lower my utilization. If I settle vs.paying it in full, will that look bad to the LO?  I plan to apply in a year.

[llecs]

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@lorenzj4 wrote:

I have a collection I want to pay before I apply for a mortgage loan. The account is still listing in revolving accounts, and the balance is still  factored in to my overall debt, so paying it will actually lower my utilization. If I settle vs.paying it in full, will that look bad to the LO?  I plan to apply in a year.

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Per FICO scoring, a settled account is just as bad as a CO'd account. In other words, your score would be no better if you settled vs. PIF. I'd guess a LO would see it no differently. You also might see a FICO increase once paid. If I had that, I would weigh the age of the acct in relation to your AAoA and if younger, pres for a PFD. 

[MovingForward_2012]

+1, correct. You need to try to get that collection PFD'd. I also don't think the revolving debt being factored into your debt and lower utilization are the same thing. I think the LO is factoring it in to your DTI and having no balance on that account would help your DTI. But having a zero balance on your credit reports, won't improve your score through lower utilization. Only reduced utilization on open revolving accounts in good standing help your score. As the other poster mentioned, paying the collection off or settling will actually hurt your score because the Date of Last Activity (DOLA) will be more recent and it will no longer be considered an old collection as far as scoring goes. So paying it off in full or settling to reduce your DTI, you risk putting your score into the non-qualifying zone. And if you do that it is game over and what your DTI is won't matter.

So just be careful resurrecting old collections.