Just 10 credit score points shy of a mortgage

Strategies for getting final points needed to qualify for home loan

Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for CreditCards.com. His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.

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Dear Speaking of Credit,
Hi. I'm 10 points away from closing on my new house. I have an old unpaid card that I can pay in full, but they refuse to remove it from my credit reports. If I still pay it off will it help or hurt me? – Melissa


Dear Melissa,
It looks like you’ve made a nice attempt at a “pay for delete,” whereby you offered to pay that old unpaid debt in exchange for the creditor or collection agency removing it from your credit reports. Yet, despite your likely frustration at their refusal, the card company or collection agency may have actually done you a favor by rejecting your request.

You’re probably thinking common sense would dictate that paying off an old unpaid debt couldn’t help but raise your score by at least a little, maybe enough for you to get those last 10 points and qualify for a mortgage. But credit scoring doesn’t rely on common sense. Sometimes paying off an old debt can help your score, however, there are no guarantees that doing so, or even getting the account removed entirely from your credit report, will provide you with those 10 points needed to close.

I’ll explain why this is so and suggest a couple of alternate ways to increase your chances of getting those 10 points as quickly as possible.

Account balances, credit limits, payments and any other dollar amounts on a credit report are only considered by the score when reported to the credit bureau within a recent timeframe. Otherwise, once the creditor or collection agency has stopped the monthly reporting of an account after a number of years – the most likely scenario with your old unpaid debt – that information is then ignored by the score for any credit utilization (balance/limit ratio) or other calculations that consider how much you owe.

For this reason, the amount of that unpaid debt may no longer be causing any damage to your score, only the fact that it has not been paid as agreed. And if that’s the case, then paying it off won’t earn you any additional points, though retiring that balance could prevent a future collection if the debt hasn’t already been assigned to a collection agency. It couls also prevent a court judgment if a lawsuit is brought against you for payment.

Where older derogatory accounts like this one affect your score most is by way of the Payment History scoring category that makes up 35 percent of your score. Here, the score looks at past due accounts in three major ways (in order of importance):

  • Recency: How long has it been since the most recent delinquency?
  • Severity: How many months past due did the account fall behind?
  • Frequency: How many accounts on the credit report show late payments?

Recency, the length of time since your most recent delinquency on any account, is the best indicator of how well your score is recovering. And despite knowing nothing else about your credit, the fact that it’s an old debt tells us that it is not likely to be having nearly as much of an adverse effect on your score these days as it used to.

Further, if your credit report includes any additional, more recent problems in your accounts, that old unpaid debt takes on even less importance to the point that a payoff or deletion isn’t likely to provide much, if any, help at all.

Now that we know what won’t help your score, what will?

If you carry substantial balances on any of your credit cards, you could gain those 10 points relatively quickly by taking the funds you might have otherwise applied to that old unpaid debt and instead paying your credit card – not loan – balances down. Reducing credit utilization on your credit cards will have a big, positive impact on your score.

If available, have your mortgage broker or lender submit documentation of those reduced card balances via the the “rapid rescore” process, a service available to mortgage applicants in which account information is updated on your credit report and included in your score within a few days rather than the usual 30 days or more.

But what if the balances have already been paid down?

Regardless of how good or bad your credit score may be, some points can be earned simply thanks to the passage of time. This is where the length of credit history scoring category that makes up 15 percent of your score comes into play. An important scoring calculation within this category is the average age of accounts (total number of months since the open date for each account divided by the number of accounts), where the longer the average age, the more points for your score.

Since longer-held accounts tend to raise the average age, and newly opened ones can lower it, you’ll want to avoid opening any new cards or loans for the time being. By maximizing your average age and other length of credit history measurements along with paying down any card debt, you’ll stand the best chance of gaining those 10 points (or more) in time to close on that new house.

See related: How rapid rescore works when applying for a mortgage, Halt card spending until mortgage closes

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Updated: 12-16-2018