Credit tips for my borrowers, by Mike in Tucson, mortgage lender
The question: "I want to improve my credit. Should I pay off charge-offs and collections?"
How the system works:
Take a look at that yellow piece of the credit pie on the right. Length of credit history is 15% of your overall credit score.
Among the data tracked by the Credit Bureaus is this little gem: "date of last activity." It shows on your credit report as DLA.
Let's say that you've come to me for a purchase money mortgage because your agent referred you. Let's say further that you did some dumb things six years ago when you were in college, and you know that a few derogatory accounts are going to show up from that time.
The old beater you had in college was repossessed by the car dealer whose billboard still reads "NO CREDIT? NO PROBLEM! The dealer sold the car at auction, and sent you a bill for the difference. The bill was for $580. You didn't pay it. The car dealer sold the debt to a collection agency.
Your credit report today says "DLA 11/2004." If you do nothing, this derogatory collection account will fall off your credit report next November, after 7 years. That's if you do nothing.
But you're making good money now working for Raytheon as an engineer, and you think to yourself "I can pay that. I think I'd better get that paid and off my credit report before I go see the mortgage guy..."
You get out the checkbook, call the collection company and pay the $580.
What that means to you:
- Derogatory accounts can be reported for seven years from the date of last activity. What would have fallen off in 2011 will now be reported until 2017. Oops!
- You paid a debt, and yet it's more than likely that your credit score will go down in the near term.
If, on the other hand, you pay off a collection or charge-off that is 12 to 24 months old, it's likely that your score will improve!
If you're my borrower, please call me before you do anything. Let's talk it over, and improve your chances of qualifying for that home you want to buy from your favorite agent!
I'm Mike in Tucson, your preferred Tucson Mortgage Lender.
SUNSTREET MORTGAGE llc ~ Correspondent Mortgage Bank
Offices (AZ) Mesa, Tucson, Nogales, and Albuquerque, NM.