Ask an Expert: Should I Pay Off My Collections to Get Mortgage Ready?

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By Bruce McClary | Thursday April 22nd, 2021

The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.

This week’s question: My husband and I are planning on purchasing a home in the near future. I have an opportunity to pay off all of my bills and rebuild my credit. I have some collections that are not paid. Would it be better to pay them completely off or let them stay there? I am not sure how mortgage lenders react to collections.

Improving your credit to the point where it helps you qualify for the best possible mortgage terms can often seem like a very big task, especially when there are unpaid debt collection accounts involved. Those accounts can have a significant impact on your overall credit health because the record they leave on your credit history indicates that you did not pay your creditor as agreed. Any amount of that balance that remains unpaid only worsens the negative impact on your credit. So, yes, you should pay off those collections and not let them sit on your credit reports, especially if you have the money to do so.

Sitting Collections

You never know what’s going to happen to collection accounts on your report. For one, they can stay there, and nothing would happen if you are lucky. But, that’s a big risk. Most likely, those creditors will take steps to collect from you, and they can even take you to court to demand payment. What if they sue you and win the lawsuit? In that case, a judgment will be entered against you in court, giving collectors the right to collect payment by whatever means are allowed by law. Depending on the debt collection laws in your state, they could garnish your wages, seize your bank accounts, or even have a sheriff come to your house and claim some of your property and valuables.

The Ages of Your Debts

Your debts have two important timelines, the statute of limitations and the time they stay on your credit reports. The statute of limitations of debt is the timeframe in which collectors can legally sue you to collect payment. If the statute of limitations in your state for credit card debt is three years and four have passed, it means the statute of limitation has expired, and the collector cannot sue you. However, the statute of limitations is different from the time that debts remain on your credit report. Debts remain on your credit for seven years from the day of the last missed payment.

If you pay your collections, they will appear as “paid” and remain in your report for whatever time is left of the seven years. Keep in mind that paying your debts in collections won’t necessarily show a drastic improvement on your credit at first. You still have all the negative payment history that led you to this situation bringing your score down. But, on the bright side, as time goes their negative influence lessens. Also, paying off collections reduced the overall debt owed on your credit reports, which reduces your utilization ratio and boosts your score. Your utilization ratio is how much you currently owe divided by your credit limit.

So again, yes, pay your collections. Start showing the lenders that although you made mistakes in the past, you are now repaying your debts and becoming a reliable borrower, ready to take on larger commitments like a mortgage. Generally speaking, paying off debts, making your payments on time, and keeping balances low can help you. The credit building process looks different for everyone because it depends on where you are right now. You can work with an NFCC Certified Financial Counselor to learn how to deal with your creditors and get a personalized strategy to build your credit to get mortgage-ready in the near future. Good luck!


Michigan license number:   DM-0016282 Available to the public and licensed in Michigan.

Section 13(1)  When a licensee establishes a debt management plan for a debtor, the licensee may charge and receive an initial fee of $50.00

Section 13(2)  A licensee shall attempt to obtain consent to participate in a debt management plan from at least 51%, in number or dollar amount, of the debtor’s creditors within 90 days after establishing the debt management plan. If the required consent is not actually received by the licensee, the licensee shall provide notice to the debtor of the lack of required consent and the debtor may, at its option, close the account. If the debtor decides to close the account, any unexpended funds shall be returned to the debtor or disbursed as directed by the debtor.

Sec. 14. (1) A contract between a licensee and debtor shall include all of the following:

(a) Each creditor to which payments will be made and the amount owed each creditor. A licensee may rely on records of the debtor and other information available to it to determine the amount owed to a creditor.

(b) The total amount of the licensee’s charges.

(c) The beginning and termination dates of the contract.

(d) The principal amount and approximate interest charges of the debtor’s obligations to be paid under the debt management plan.

(e) The name and address of the licensee and of the debtor.

(f) Any other provisions or disclosures that the director determines are necessary for the protection of the debtor and the proper conduct of business by a licensee.

Sec. 18. (1) In addition to the fee described in section 13(1), a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.

(2) A licensee may offer a debtor the option to purchase credit reports or educational materials and products, and charge a fee to the debtor if the debtor elects to purchase any of those items from the licensee.  Fees charged under this subsection are not subject to the 15% limitation on fees described in subsection (1).

(3) Except for a cancellation described in subsection (4), in the event of cancellation of or default in the performance of the contract by the debtor before its successful completion, a licensee may collect $25.00 in addition to any fees and charges of the licensee previously received by the licensee. This $25.00 fee is not subject to the 15% limitation on fees and charges under subsection (1).

(4) A contract is in effect when it is signed by the licensee and the debtor and the debtor has made a payment of any amount to the licensee. The debtor has the right to cancel the contract until 12 midnight of the third business day after the first day the contract is in effect by delivering written notice of cancellation to the licensee. A cancellation described in this section is not subject to, and a licensee shall not collect, the fee described in subsection (3).

(5) If a debtor fails to make a payment of any amount to a licensee within 60 days after the date a payment is due under a contract, the licensee may, in its discretion, cancel the debt management contract if it determines that the plan is no longer suitable for the debtor, the debtor fails to affirmatively communicate to the licensee the debtor’s desire to continue the plan, or the creditors of the debtor refuse to continue accepting payments under the plan.

(6) A licensee shall not contract for, receive, or charge a debtor an amount greater than authorized by this act. A person that violates this subsection, except as the result of an inadvertent clerical or computer error, shall return to the debtor the amount of the payments received from or on behalf of the debtor and not distributed to creditors, and, as a penalty, an amount equal to the amount overcharged.

530 W Allegan Street, 7th Floor
Lansing, MI  48909-7720

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