Which account will dock more points from your credit score and hurt you the most when applying for a home loan?
- A) 30-day late payment on 5/2019 for $10 with Target
- B) $249 unpaid collection on 9/2014 with Verizon Wireless
- C) $5,000 tax lien on 1/2010 with the IRS
If you said (C) the tax lien because it’s the largest and most serious, I can’t blame you, but that is incorrect.
If you said (B) the collection, that is also incorrect.
It is the little $10 late payment that will dock the most points from your credit report, because it is the most recent derogatory account.
It is not the dollar amount but the “Date of Last Activity” that carries the most weight for credit scoring.
Also surprising to many, that little Target late payment will be your biggest hurdle to cross when applying for a home loan. Why?
Because it just happened! Underwriting wants to know why you aren’t able to make a small payment, why you aren’t managing your finances– especially if there are several late payments within the past 12 months. This little late payment will cause you to pay a higher monthly mortgage insurance fee for having a lower score, too.
As for (B) the $249 collection, that can be ignored. It’s five years old and it’s under $250. (FHA is even more generous and ignores under $2,000.) Mortgage underwriters will not regard it as long as your credit score qualifies.
As for (C) the tax lien, if you are in a repayment plan with the IRS and are making monthly payments, that payment will be included in your debt ratio just like a car payment or any other payment. It will not stop you from becoming a home owner.
It’s Not Fair!
If you “decide to do the right thing” and pay off the $249 collection, your score will suddenly drop.
This is because you have “updated the date of last activity” from five years ago to today.
It doesn’t make sense, and it’s not fair, but that is the way the FICO score has been set up. It is essential to know the “credit score rules” so that you can win at the game. When you know how credit scoring works, you are literally in control of your own score.
If you’ve got credit challenges, don’t wait to sign up for a free consultation HERE. So many good people have improved their credit and you can, too!