The Wisdom Of Paying Old Debts To Improve Your Credit

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The Wisdom Of Paying Old Debts To Improve Your Credit

By |September 26th, 2014|

If you’ve got a debt from years ago, don’t make the mistake of prolonging the negative impact is has on your credit history.

Old debts can plague your credit for years, dragging down your score long after the date you went into default.

In fact, according to credit reporting agency Equifax,  a collection account will usually remain on your credit report for seven years from the date the account first became past due.

That means a debt six years past due will stay on your credit report for one more year, at which time it falls off your credit report.

Once a debt falls off your credit report, it will no longer drag down your credit score.

But let’s say you’re impatient and decide to settle a debt that’s five years old. Smart move, right?

Not necessarily.

Credit accounts generally remain on your credit file for up to ten years from the date of last activity on the account. That means the debt will be reported for ten years following the date of payment – so if you pay a debt in full after five years, it will be reported for a total of 15 years (5 years of past due status PLUS 10 years of reporting after payment in full).

If you’ve paid the debt in full on a timely basis, that’s not terrible. The history of payment shows you were on top of things, and there’s no negative notation on your credit file.

But if the debt was past due or charged off, paying it after five years means there is an additional decade during which the notation that it was paid after being past due will show up on your credit report.

That may not drag your score down for more than a few years, but it still means you may have some explaining to do in the event that a new lender pulls your credit report.

The better way might be to simply … do nothing. Let the unpaid debt fall off your credit report and move on with your life once it’s gone.

That tactic may not work for everyone in every situation. For example, if you need to resolve some old debt in order to get a new job then you don’t have the luxury of time.

In addition, there’s always the chance that the creditor sues you during the applicable statute of limitations. In that case, you may have larger legal obligations to worry about.

But if you’ve got the ability to wait it out – and are prepared for the consequences of your actions, both good and bad – it may not be a bad idea.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.