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Can Paying Off Debt Hurt Your Credit Score?

If 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 [3] 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 [4])