Most consumers know that paying off debt is the best way to find financial security and improve your credit. As with all other things in life there is always an exception to the rule and paying off debt is no different. While it is true that making timely payments and keeping your debt-to-credit ratio low is a good way to improve your credit score, paying off old debt may not have the same effect.
Reviewing your credit report has long been recommended as the first step toward understanding and improving your credit. By reviewing your report you are able to dispute inaccurate reporting and see older accounts that may be causing your score to currently suffer. If you have charge-offs, accounts in collection or other delinquencies you may be tempted to immediately tackle them in order to raise your score. Before you grab your checkbook or pick up the phone to arrange a payment you should know that in some cases paying off an older debt will not improve your credit score and may actually cause it to drop. Be prepared for the following actions before moving forward with your plans to pay off aged debt.
Collection Efforts Increase- Depending on the amount of time that has passed, you past due account may have fallen off the radar at the collection company. If you haven’t heard from a collection agent in some time you may have forgotten how aggressive they can be when pursuing a payment. Once you contact the creditor, even to inquire about a past due account you will likely bring yourself front and center for hard ball collection efforts.
Restart Statue Of Limitations(SoL)- Each state has its own statue of limitations on collecting past due debts. In short the SoL determines the amount of time a creditor or collection agency can file suit against you for an unpaid debt. Any action on your part can start the clock over on the SoL, which means contacting your creditor, agreeing to make a payment or sending a payment restarts the amount of time the creditor can sue you for the remaining balance. Keep in mind that even after the SoL has passed in your state the creditor can still sue you, however you can ask to have the case dismissed on the grounds the SoL has expired.
Changes To Your Credit Score- If you settle an older account for less that the balance due, you will eliminate the debt but take a hit on your credit score. Paying an account that has already been charged-off or reported as a zero balance may not hurt your score however it probably won’t help it either.
Whether or not you decide to pay off older debt or let it age off your credit report, it will never simply “go away”. For this reason many people who now have the resources to pay past debts decide the only ethical thing to do is pay off the debt and deal with the negative results on their credit report.