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Can Paying Off Debt Hurt Your Credit Score?

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Fix Your Credit HereIf you want to raise your credit score, the best way to do it is to pay off your debts—that’s the conventional wisdom. That’s normally true but there are some debts where the advice we hear from financial gurus should be ignored.

Very few people know how FICO scores are calculated and the ones who do aren’t allowed to talk about it so we’re all forced to make some assumptions. Credit experts believe that your credit score is based 35% on your payment history and 30% on what you owe right now. The rest of the number is more difficult to control but what is for certain is that a large portion of your credit score is in our control.

If you have old debt that still remains unpaid, here’s how you can use that debt to maximize the positive effect on your credit score.

Statute Barred Debts

Statute Barred Debt is debt that can’t be collected by the creditor because it is too old. Different types of debt have different expiration dates and that can vary by state. Credit card debt often becomes statute barred after six years where loans secured by a deed may not expire for twelve years.

Delinquent Accounts

If you have an account that is still active but your payments are late, bringing it up to date will have a positive effect on your credit score. You will still suffer the penalties of being late with payment but your score will get an instant boost when isn’t listed as delinquent.

Charge Offs

When a company charges off a debt, they are taking the loss and not expecting any further payments from you. That doesn’t mean you don’t still owe the debt and because you have a debt that you are unwilling or unable to pay, your credit report suffers.

Any contact you have with the debtor may remove the charge off and make the debt in to a delinquent account. Settle these debts by saving up enough money to pay it in full. Then call the debtor and try to negotiate a settlement that eliminates the fees and a portion of the interest that was added. Also ask them to list the debt as “Paid as Agreed” instead of “Paid Charge Off.”

Payment Schedule

If you have both charge offs and delinquent accounts on your credit report, pay the delinquencies first. This will have a positive effect on your credit report very rapidly. After those debts are paid, pay the charge offs.

It goes without saying that if you owe a debt, you should pay regardless of its status but there is nothing immoral about paying in a way that maximizes the positive effects on your credit score. Debt collectors know that a large amount of delinquent debts are never paid so they’re often willing to negotiate with you. Collecting any portion of the debt is seen as a victory for them.

(Photo: travistruman)

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9 Responses to “Can Paying Off Debt Hurt Your Credit Score?”

  1. Sun says:

    For charged off debt, you don’t mention negotiating a settlement for less than the total owed. The collectors will raise the actual amount owed… If you remember your actual debt, save up some cash, and negotiate a written settlement. Keep copies of the letter they send you to settle and copies of any payments you make. Don’t send a check or a credit card number (unless virtual) as they’ll try to get more money from your bank or credit card.

    You may need to discuss on the phone for months, but you can try to settle for like 20% of the original debt.

    • Jo says:

      Be careful of settling for less than the full amount. I did this – had full agreement that the debt would be paid in full (for less than full amount which I was ok with since we were doing 10% of balance). They reported it the same to all credit agencies. Only one took a surprising action: Experian. Experian chose to somehow “re age” the account as if it was a NEW derogatory item – because we paid in full as agreed legally. That dropped my credit score by 84 points. Clearly not the desired outcome. I’ve filed a dispute with how they are handling it but you know they have your you know what over the fire. I don’t expect much. I don’t see what else I can do. I’ve done a statement on the report…and again no other agencies have it reported this way (and in both other agencies cases Equifax and Transunion the settlement either did not affect my score or raised it a few points). Thankfully Experian says this is scheduled to go off my report in April 2013 so the end is near at least. But take it from me – I’d of been MUCH better off waiting to settle until AFTER the debt was off the report or (flatly) not settling at all.

    • Jo says:

      Be careful of settling for less than the full amount. I did this – had full agreement that the debt would be paid in full (for less than full amount which I was ok with since we were doing 10% of balance). They reported it the same to all credit agencies. Only one took a surprising action: Experian. Experian chose to somehow “re age” the account as if it was a NEW derogatory item – because we paid in full as agreed legally. That dropped my credit score by 84 points. Clearly not the desired outcome. I’ve filed a dispute with how they are handling it but you know they have your you know what over the fire. I don’t expect much. I don’t see what else I can do. I’ve done a statement on the report…and again no other agencies have it reported this way (and in both other agencies cases Equifax and Transunion the settlement either did not affect my score or raised it a few points). Thankfully Experian says this is scheduled to go off my report in April 2013 so the end is near at least. But take it from me – I’d of been MUCH better off waiting to settle until AFTER the debt was off the report or (flatly) not settling at all.

  2. Dave says:

    I feel like the title and opening paragraph of this post are misleading. The author starts off with “That’s normally true but there are some debts where the advice we hear from financial gurus should be ignored.” and then goes on to give us a list of basic things that can hurt our credit score. At no point is the headlining question talked about.

    The author seems to indicate that paying some debts will lower someones credit score, and then doesn’t expound on that in any way.

    • Scott says:

      Ditto on that. Would have been better if you wrote how not to get into the “bad” debt and the benefits of being as debt UNRELIANT.

  3. Strebkr says:

    Can someone explain why the formula is such a secret?

  4. timparker says:

    Thanks for the feedback, everybody. Yes, FICO discloses percentages but that’s not the end of the story.

    http://www.bankrate.com/finance/credit-cards/how-scorecards-affect-credit-scores.aspx


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