Credit Report Activity & Your Credit Score

Will my credit score go up or down if I pay a delinquent debt?

I am getting conflicting information on paying off collections. I have two medical collections on my credit report, one of which is 7 years old (about $450) and one of which is 2 years old (about $500), and a FICO of 620 though I pay my mortgage and HELOC on time and pay my credit card in full every month. One answer is that if I pay off a collection my score will DROP because I have caused "activity" on an old negative account. The other answer is that paying it off will raise my score. Thanks, Dallas debtor ps - I did send letters to both collection companies offering to pay in full if they will delete these items, rather than marking them paid. Both NCO and a law firm sent me letters refusing to do so. I used a form letter I found online which includes a statement that I was NOT acknowledging the debt was mine.

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  • If you pay the debt now, your credit score will not decrease because the damage was done at the date of first delinquency. Your paying the debt now will lift your score because it will indicate a resolution of the account.

The short answer to your question is paying your account will increase your score.

Fair Credit Reporting Act 7-Year Rule

Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies (CRAs). The specific law is called the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer’s credit report for up to 7½ years. To determine when an account will be removed by the CRAs (TransUnion, Equifax, and Experian and others), add 7 years to the date of first delinquency. The date of first delinquency is shown in credit reports. Subsequent activity, such as resolving the debt or one debt collector selling the debt to another collector, is irrelevant to the 7-year rule.

Some debts have a reporting period longer than 7 years, including:

  • Tax liens: 10 years if unpaid, or 7 years from the payment date
  • Bankruptcy: 10 years from the date of the final order
  • Perkins student loans: Until paid in full (20 U.S.C. §1087cc(c)(3))
  • Direct and FFEL loans: 7 years from default or rehabilitation date (20 U.S.C. §1080a(f)(1) and 20 U.S.C. §1087e(a)(1))
  • Judgments: 7 years or the debtor’s state statute of limitations on judgments, whichever is longer

The FCRA 7-year rule is separate from state statutes of limitations for debt issues. Learn the lifespan of a judgment in your state at the Bills.com Statute of Limitations Laws by State page.

The start of the 7-year period begins at the date of first delinquency, or if no payments are made, when the first payment was due. Review your credit report carefully to make certain the dates of first delinquency are reported correctly. Unscrupulous collection agents reset the date of first delinquency to stretch out how long a derogatory account appears on consumer’s credit report. This is illegal under the FCRA.

Just because a debt does not appear on a credit report does not mean the statute of limitations for the debt has passed. The opposite is also true: The passing of a state statute of limitations on a debt does not mean the debt may not appear on a credit report. The federal FCRA and state statutes of limitations are separate and independent of each other.

Whether a debt appears on a credit report does not establish legal liability for the debt. The opposite is also true: You may have legal liability for a debt not reported to the credit reporting agencies. Credit reports are not legal records of every debt a person owes.

Improving your credit score

If you pay the debt now, your credit score will not decrease because the damage was done at the date of first delinquency. Your paying the debt now will lift your score because it will indicate a resolution of the account.

As you are inquiring about how to improve your credit score, let me give you some information on how a credit score is calculated. Your credit rating is calculated based on several variables, including:

Payment history

Payment history counts for approximately 35% of your score and is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.

Total debt and total available credit

This counts for about 30% and weighs how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score.

The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.

Length of positive credit history

This counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (5 or more years) and no missed payments, you should keep these open and paid off.

Mix of types of credit

This counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.

The number of new credit applications you have recently completed

This accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.

How to improve a credit score

Here are four steps to improve your credit score:

1. Pay off all debts and keep revolving lines below 25% utilization. Do not "max out" any loans or cards.

2. Diversify you credit portfolio. If, for example, you have only a Visa, MasterCard, or Discover card, get a department store credit card or card from a gasoline retailer. Make your payments every month. Leave a small balance every once in a while to show that you are able to handle debt on more than one account.

3. Keep your oldest credit account active. Remember "Length of positive credit history" discussed above.

4. Pull your credit report and contest any inaccurate information so that it can be corrected by the credit bureaus. Go to the Bills.com debt self-help center for sample dispute letters. The credit bureaus must follow the rules set forth by Congress in the Fair Credit Reporting Act (FCRA).

If you would like to learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered by the Bills.com credit information page.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

2 Comments

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  • 35x35
    May, 2010
    Bill
    Once a derogatory item on an account reaches 7½ years in age, it must be removed from a person's credit report. Settling a six-year-old debt will not reanimate debts that are more than 7½ years in age.
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  • 35x35
    May, 2010
    sumeira
    Hello Bill, i have a judgment from october 2003 FOR 5700. I have managed to live with my husbands credit score (760) but now we want to buy a house where we need both our salaries and credit histories. This judgment would have drop this december because it will be 7 yrs from the time it was passed if i ignored it for a few more mnths. but we really need to buy this house - the only way i can get a loan with my husband is to satisfy this judgement. so i am considering negotiating and paying the minimum it will take to get a satisfied letter. My question is if i do pay this judgment, would my other bad debts which are 10 plus yrs old and have dropped from my credit history become alive all over again. I dont want to open a can of worms, please help with any advice. Thanks
    0 Votes