Oct 21, 2007
Settling Old Debt Can Hurt Your Credit Scores
Did you know that settling some old debts can actually harm your credit score? Consumers shouldn’t always assume that paying off old debts will improve their financial situation or make them a better risk in lenders' eyes. Borrowers who try to pay off old delinquencies, charge-offs and collection accounts often find that sometimes, doing the right thing does the wrong thing to your credit.
How can this be possible? The Fair Isaac Corporation, the company that determines your FICO scores, has fairly determined that the most recent accounts on your credit count towards your scores the most. The older the account is on your credit report the less it factors in to your scores and a lot of times when you pay off a debt you make the account current. The only problem is that the credit bureaus still report the account as negative, but now instead of being old, it’s brand new like it just happened. It will stay on your credit report for 7 more years. This can damage your credit scores drastically.
Before you consider paying off an old debt on your credit report, you may want to contact the creditor in writing. Tell them of your good intentions and ask them if they will agree to delete the account from your credit reports if you settle your debt (lots of times for much less than you owe). Get their agreement in writing!
You must be careful when contacting creditors though. Arranging a payment plan or even inquiring about an old debt can restart the statute of limitations in some states, allowing creditors to sue you. Simply contacting a creditor about a past-due account can renew its interest in trying to collect, leading to harassment and hardball tactics.
Some debt collectors will actually refuse to delete the account from your credit reports, even if you pay. Others will pretend they are “not allowed” to. That is obviously not true.
Even worse, some unethical collection agencies may promise to upgrade how your debt appears on your credit report in exchange for payment, then not follow through or make matters worse by making the debt seem more recent than it is.
So, what should you do if they won’t agree to delete it? Simple – don’t pay it. Wait until the end of 7 years for it to come off of your report. It’s really not hurting your scores that much anyway and the older it gets, the less it factors in.
Instead of paying them off, work to get new positive accounts reporting on your credit report. As the old negative accounts become less relevant, the new positive accounts become more relevant and increase your credit scores.
Remember to always monitor your credit reports to make sure that unethical collection agencies don’t purposely re-age your accounts. It’s illegal, but it still happens quite often. Check your state’s collection laws to see how long a collector can collect on your debt. Once the debt is past the statute of limitations, they can no longer legally collect on that debt.
How can this be possible? The Fair Isaac Corporation, the company that determines your FICO scores, has fairly determined that the most recent accounts on your credit count towards your scores the most. The older the account is on your credit report the less it factors in to your scores and a lot of times when you pay off a debt you make the account current. The only problem is that the credit bureaus still report the account as negative, but now instead of being old, it’s brand new like it just happened. It will stay on your credit report for 7 more years. This can damage your credit scores drastically.
Before you consider paying off an old debt on your credit report, you may want to contact the creditor in writing. Tell them of your good intentions and ask them if they will agree to delete the account from your credit reports if you settle your debt (lots of times for much less than you owe). Get their agreement in writing!
You must be careful when contacting creditors though. Arranging a payment plan or even inquiring about an old debt can restart the statute of limitations in some states, allowing creditors to sue you. Simply contacting a creditor about a past-due account can renew its interest in trying to collect, leading to harassment and hardball tactics.
Some debt collectors will actually refuse to delete the account from your credit reports, even if you pay. Others will pretend they are “not allowed” to. That is obviously not true.
Even worse, some unethical collection agencies may promise to upgrade how your debt appears on your credit report in exchange for payment, then not follow through or make matters worse by making the debt seem more recent than it is.
So, what should you do if they won’t agree to delete it? Simple – don’t pay it. Wait until the end of 7 years for it to come off of your report. It’s really not hurting your scores that much anyway and the older it gets, the less it factors in.
Instead of paying them off, work to get new positive accounts reporting on your credit report. As the old negative accounts become less relevant, the new positive accounts become more relevant and increase your credit scores.
Remember to always monitor your credit reports to make sure that unethical collection agencies don’t purposely re-age your accounts. It’s illegal, but it still happens quite often. Check your state’s collection laws to see how long a collector can collect on your debt. Once the debt is past the statute of limitations, they can no longer legally collect on that debt.
Labels: credit scores, credit scoring, debt collectors, debt settlement, Fair Isaac, FICO, settle debts
posted by Chane Steiner at 11:43 PM | 
