When a consumer does not pay a debt for a period of time it often turns into a collection account. You can have collections from debt owed to credit card issuers, medical professionals, libraries, schools, service providers, insurance companies, vendors, and more. Each type of creditor can have a different time frame in which an account might be sent to a collection agency. Often, these creditors can lend or sell the debt to a third party agency that is in business to make a profit from the collection of these unpaid obligations. Since these collection agencies get their income from payment of the outstanding debt they often use very aggressive & sometimes misleading tactics, often telling debtors that once the debt is paid, it will all be ok, and their good credit rating restored. This is false, since a paid collection will not change a credit score for the better! Around four years ago, paying a collection could reduce scores due to new activity on an old bad debt. ( it updated the most recent action date associated with the account) However, this is no longer the case and there usually will be no increase or decrease in score.
A common problem we often see are consumers who are in the process of applying for a mortgage going into a panic once a collection is found on their credit reports. The loan officer, while looking over the credit report, discusses the collection with the applicant. The consumers often react by wanting to call the collection agency and making a payment immediately, to ‘clear things up'. Although this may appear to be a good move, once the collection is paid it makes it more difficult if not impossible for the collection to be removed from the credit report, which is often more advantageous. This can end up being a bigger problem for a home loan applicant. There are several ways a credit repair consultant can work at having a collection account be deleted and if a payment is made most of them are rendered useless. It is important for those who find themselves in this situation to speak to an expert before taking any action. Removing one collection could be the difference between a successful closing or the loss of a dream home. In other cases it could be savings of thousands of dollars on monthly mortgage payments.
Make sure before dealing with a collection account you and your clients have a clear understanding of the ramifications of taking the wrong action. Giving the collection agency information or paying them can ruin the chances of removal. Before taking any action on your own to ‘fix' your credit, be sure to consult with your mortgage professional to ensure you don't do more harm then good!
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