How and when you pay your debts affects your credit score more than any other factor. Payment history accounts for 35 percent of your FICO score. If you consistently pay your debts on time, your credit score reflects that good activity. If you let your debts go to collections, your credit score drops. You can alleviate some of the damage by paying off creditors, but you need to go about it the right way.
If you can’t handle your bills, one solution that won’t negatively affect your credit score, according to Bankrate.com, is to sign up for a debt-management program. Debt-management counselors typically get a better deal for you by negotiating with your creditors to get your interest rate lowered, your monthly payments lowered or to waive any late fees. You would contact a credit-counseling agency that handles your bills for you. The National Foundation for Credit Counseling is a good place to find a counselor. All you need to do is write a monthly check to the agency. You will get a notation on your credit report that you are using a credit-counseling agency to pay your accounts, but that should not cause your score to drop.
Debts Nearing Seven Years
If you have an unpaid debt nearing seven years old, generally it will drop from your credit report after seven years. If you decide to pay the debt, you revive it, and you start the seven-year clock ticking on that account all over again. Creditors might not have the right to sue you for an old debt because of statute of limitation laws that vary by state and type of debt. Most states have a statute of limitations for credit card debt that lasts three to six years, according to the Federal Trade Commission. Your State Attorney General’s office can let you know the limitations in your state.
Charge-offs affect your credit negatively and might prevent you from getting a mortgage, an apartment or even a job. A charge-off is a function creditors use for tax purposes when they have been unsuccessful in collecting a debt from you for four to six months. The debt then goes to a collection agency. You can improve your credit score by paying off the bill collector. You can pay the bill in full or try to settle with the bill collector for less than what you owe. If you pay it in full, you help your credit score the most because the entry will show that you had a charge-off but that you paid it. If you settle, it will help your credit report somewhat by listing that you settled your bill.
Paying Off Credit Card
If you pay off your credit card account to zero, your credit score will be slightly lower than if you use a small percent of your available credit. Barry Paperno of FICO explained to Bankrate.com that the lower your credit utilization rate, the better, but some utilization is better than none. Credit utilization accounts for 30 percent of your FICO score. You get the most points for using less than 10 percent of your available credit instead of paying off the entire credit card bill to zero. If you stop using your credit cards completely, your score will take another hit if the issuer closes your account. Length of credit makes up 10 percent of your credit score.
- MyFICO: What's In Your FICO Score?
- Bankrate.com: Debt Management Plan Trumps Bankruptcy
- Equifax: FAQ: How Long Does Information Stay on My Credit Report?
- Federal Trade Commission: Time-Barred Debts
- Bankrate.com: Paid Charge-Offs Better For Your Credit
- Bankrate.com: Can Paying Off Credit Cards Hurt Score?
Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.