Paying Off Your Old Debt Doesn’t Always Have a Positive Impact on Your Credit
Yes, you read it absolutely right and if you’re planning to pay off your old delinquent debts in order to boost your credit score, please, give it a second thought. Most of us have a sort of preconceived notion that paying off our old debt can improve our credit score significantly. However, this idea is not entirely accurate. Sometimes the strategy of paying off your old debts can go terribly wrong and can drop down your credit score further. In fact, if you enroll in debt settlement programs to reduce the amount owed, you can end up damaging your credit ratings further. Therefore, before making any drastic decision like paying off your old debts, you must consider a few points.
What affects your credit score?
Though FICO never discloses its credit scoring formula, it can be anticipated that almost 35% of the total credit rating is decided on the basis of your credit history and 30% on your current debt amount. Therefore, logically if you have outstanding debts, paying it down will certainly boost your credit score. Though, it’s true you won’t be able to waive off the late payments that are showing, but paying down the debt to current status and reducing the overall amount owed will show some positive effects on your credit score. However, it’s not always the same old story. Paying off you debt won’t abolish the impact that previous delinquent payments have on your credit score. Rather depending on the status of the debt, paying off a charged-off debt can damage the currently-owed category.
If you have old debts, which are already charged off by the creditors, it means the creditors expects no further payments for it. However, opting for a new repayment plan can re-activate these debts and make them appear to be more current than they actually are. This mostly happens with the debts, which are sold to a debt collection agency. This is because; in most cases the agency records the debt with credit bureaus as new rather than reporting it as the old written off debts. For obvious reasons the newer the debt is, the worse is the effect on the credit. Therefore, if you make an attempt to pay your old delinquent debts, you can end up hurting your credit score. In order to avoid such situations make sure you remove the charge off status on your old debts and show them as paid in full.
Likewise, when you decide to settle your accounts for less than the amount owed, the lenders either records the accounts as paid or show the accounts as settled. In the first case it might have positive effects on your credit score, but when the lenders mark it as settled, it will affect your credit score adversely. Therefore, while you are negotiating with your creditors for a settlement plan, make a point that after settlement, the creditors must notify your accounts as paid and not as settled.
What to do
Remember, paying off debts that are still displayed as delinquent can give you the biggest boost to your credit score. However, you must examine older debts that are marked as charged off thoroughly before paying them off. Check state laws minutely before contacting the creditor or collection agency in order to verify whether your debt is statute-barred or not. If you figure out your debts are already too old, creditors might not attempt to collect it further. However, if you discover your accounts are not statute-barred, contacting the creditor can re-instate the debt as currently collectible, and can trim down your credit score further.
In case you discover the debt is nearly reaching its seventh year and therefore soon will drop off of your report on its own, wait patiently, because as soon as it drops off it won’t affect your credit score in any way. In case you find the debt shows as canceled but remain displayed on your credit report for couple of months, consider paying it off before making any contact with the lenders. This will re-activate the debt and hurt your credit to some extent, but at the same time as it will display payment in full, it will fix the damage to your credit.
Keep the aforementioned points in mind and make your due payments right on time to raise your credit score in future.