Recently, on Twitter, we were part of an exchange between TransUnion (the major credit bureau), and a man named Dan Higgins. Dan was trying to buy a home for his family, using an FHA mortgage. FHA mortgages are quite popular amongst first time homebuyers.
Mr. Higgins had paid a collection account, and was seeking to have it removed from his credit reports. He was told that he needed to have this collection removed, in order to qualify for an FHA mortgage, so that he could purchase a home for his family. Apparently, even with the collection paid, Dan did not yet meet credit score requirements for the FHA mortgage.
Why wasn’t it enough that Dan had paid the collection? Shouldn’t that have been sufficient for him to qualify for the loan? Not neccessarily. Here’s why
FICO & VantageScore
It is first important to understand a bit about how credit scoring works. As we’ve discussed elsewhere, there are two main types of credit scores in use: FICO & VantageScore.
VantageScore is a type of credit score which was created by the three major credit bureaus, working together. VantageScore was founded in 2006, and has grown in popularity since then.To date, there are 4 versions of VantageScore. If you use Credit Karma or Credit Sesame, you’re viewing your Vantage scores.
Yet, FICO is still the credit score of choice, for most lending decisions. There are dozens of different versions of FICO, with scoring models that are specifically focused on mortgages, auto loans, credit cards, and more.
FICO Scores & Paid Collections
Different versions of FICO treat paid collections differently. FICO 9, which is one of the newer FICO models, does not penalize paid collections. However, FICO 8 (which was released about 8 years ago) continues to penalize borrowers, for both paid and unpaid collections of over $100. Collections of less than $100 are not counted in FICO 8.
The FICO scores used for mortgages are the Equifax Beacon 5.0, Experian/Fair Isaac Risk Model v2, and the TransUnion FICO Risk Score 04. When you apply for a mortgage, the lender will put your credit reports, and look at your scores for each lender. They’ll then use the middle of your three scores, to decide whether you qualify for a mortgage.
All mortgage credit scoring models consider both paid and unpaid collections. Even if you’ve paid a collection account, your mortgage credit score will still be impacted. While a paid collection can be a little better for your credit than an unpaid collection, it’s still damaging. This is why Mr. Higgins needed his paid collection account removed – without it deleted, his FICO score wasn’t strong enough to qualify for a mortgage.
Removing Paid Collections Accounts From Your Credit Reports
By law, information on your credit reports must be accurate, verifiable, timely and complete. If an account on your credit reports does not meet these legal requirements, it must be either corrected or deleted. The federal law which controls credit reporting is the Fair Credit Reporting Act (known as the FCRA).
Debt collectors must also comply with the Fair Debt Collection Practices Act (known as the FDCPA). The FDCPA regulates how debt collectors may contact you, what sort of things they can say when they make contact, and the overall sort of conduct expected of debt collectors.
Given how common credit reporting errors are, it is quite possible that a paid collection account on your credit reports does not meet all FCRA requirements. It is also possible that the collector has not fully complied with the FDCPA.
The Truth About Pay For Delete
You’re allowed to dispute information on your credit reports, if you believe it may not meet FCRA requirements. You can also point out the ways in which a collector might not have complied with the FDCPA. Given that a collector stands to make no money from a paid collection, paid collections often prove to be a bit easier to remove (assuming you know what you’re doing).
One popular strategy to remove collections accounts, is to negotiate a deletion of the account at the time you pay. This is known as “pay for delete.” There are debt collectors who will agree to pay for delete. However, many of them have agreements with the credit bureaus to not delete collections accounts in exchange for payment, and so won’t do so.
For this reason, you should not get too stuck on negotiating a pay for delete arrangement. If a collector does not agree to a pay for delete arrangement, you can always use the FCRA and FDCPA strategies discussed above, to address a collection after it is paid.
The Final Word
Clearly, there are a lot of misconceptions around paid collections accounts. They can still harm your credit score, and hold you back from purchasing a home, qualifying for credit cards, or simply enjoying the peace of mind that comes with strong credit. Fortunately, there are very effective strategies to fight paid collections, and ultimately improve your credit score.
