Where Credit Is Due: Clearing Up Your Credit Score

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By Mia Bolaris-Forget

We all work hard to get or stay out of debt and are likely proud of paying our bills off on time, but now, some experts are saying that, that may not be our best option. In fact, they note, that paying off debt may actually (in some cases) be detrimental.

They assert that because the credit rating system is “saturated” with quirks, combined with state statutes of limitations and the federal Fair Credit Reporting Act, can easily lead to financial confusion and may even lead to your credit score dropping after you’ve paid off your debt.

And while this particular glitch is something major financial organizations have taken care of this “glitch’ there are others may adversely effect an otherwise “excellent” credit score.

· Settling accounts for less than you owe which can hurt your credit score.

· Arranging a payment plan asking about an old debt that can restart the statute of limitations in some states, making it easier for creditors to sue you.

· Contacting creditors about a past-due account may lead to reinstating the interest rate and the company again trying to collect and potential harassment.

· Unsavory collection companies may offer you ways to upgrade how your debt shows up on your credit report in exchange for payment, then drop the ball resulting in the debt seeming more recent than it actually is.

What’s important to understand is that typically creditors will write off and account as “bad” about six moths after delinquency, and the write-off is reported to the credit bureaus as a “charge-off”.

While some consider this a way to get “rid” of the debt and no longer have to pay, this is not the case. In fact, a “charge-off” is simply an accounting term, not one that pardons you of your financial obligation.

Generally, lenders will turn the charged-off account over to its collections department or a collection agency, and you’ll have two entries for the same account of your credit report: one from the original creditor and another from the collection agency.

And, if you have more than two entries for the same debt it usually gets passed from one collection agency to another, you can ask that one of the extra entries is removed.

Leaving debt unpaid contributes to diminishing your credit rating and seriously hurts your score.

But, according to experts there are other important factors to keep in mind.

With regard to your FICO (credit) score, the one most used by lenders, what’s most important is what the original creditor notes about your credit report. The status and amounts owed shown on that entry will affect your credit score more than what is noted by collection agencies.

If the original creditor shows a charge-off with an outstanding balance, you may be able to better your credit score by paying off the bill and getting the original creditor to reset the balance to zero.

On the other hand, if you balance IS at zero, which can be considered customary when a collection agency takes over your account, you’re generally unable to correct or improve your score by paying up.

In fact, in the past making a payment to an old, past-due account could actually hurt your score and make the situation worse since the action “updated” the negative mark in the eyes of the credit-scoring formula, making it appear more recent than it actually was.

And experts note that the recency of your negative mark is significant to your score. The more recent the problem, the more heavily it goes against you.

However, policy in recent years has helped create a new formula that can distinguish between new payments and new delinquencies.

With that said, making a payment on monies owed won’t negatively affect you or your score, but settling an account for less than you owe may. While these payments may cause the creditor to “ease up” the labeling of “settled” on your credit report can sometimes be worse for your FICO score than simply leaving it open and unpaid.

In fact, “settling” the account can contribute to an updated date that seems more recent and lowering your score. But, this presumes that you’re still dealing with the original creditor. If however you’re dealing with a collection agency, it may go either way.

Still, harboring an unpaid debt, especially if you want to “invest” in the future by perhaps buying a house, may not be too wise. Mortgage lenders may actually require you pay off your debt before they offer you the loan.

And, if you want to settle, credit experts recommend (as part of your negotiations) asking the creditor or collection agency to either stop reporting the account or demanding that the account be reported as “paid in full” rather than settled. Though it won’t help your score, it won’t hurt it either and you’ll have more clout if you’re able to pay a lump sum rather than setting up a payment plan.

But, keep in mind that credit agencies do not favor such tactics and have even banned companies for failing to properly report transactions, but you can still try.

Remember your credit score is based on information in your credit report and there are certain limits on how long you can be “penalized”. In fact, a negative item on your file generally means it can be reported for 7 ½ years from the time you stopped paying on the account and bankruptcies can be reported for 10

Hence it becomes obvious shy some borrowers elect to simply have their old debts ‘fall off” their credit report rather than try to catch up or repay. Once your negative score is cleared your credit score is likely to improve and you’ll still have the money you would otherwise have sent to your old creditors.

However, in credit scoring, sometimes the way FICO is designed, sometimes a score actually drops after old, bad accounts disappear.

With that said, experts assert that it’s best to also know your state’s statues and limitations and the amount of time that a creditor is able to sue you after an account is declared delinquent. Sometimes the statute is longer than the credit reporting limits, and in other cases shorter.

And, don’t hesitate to contact a debt specialist and/or a consumer attorney for help. You can get referrals from the National Association of Consumer Advocates.