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Question:
DEC 12, 2011

Advice on paying off old debt and improving credit score

How do I get my old debts paid off so that I can raise my credit score?

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Bill's Answer: Bills.com Resident Expert

The best way to determine old debts is to obtain a copy of your credit report from each of the three major credit reporting agencies -- Equifax, Experian, and TransUnion. Your credit reports should list the accounts in past due/collection status. You can get a free copy of your credit report by visiting www.annualcreditreport.com.

Once you have your credit reports, you need to examine each one them carefully and make a list of the accounts that are showing past due or in delinquent status. You credit reports will also state the name of the creditor and their contact details. You will then need to contact the creditor for each one of the negative accounts and workout a payment plan with them. It is important that you keep record of all your communication with them. Once an agreement is reached and you make the payments that are due, make sure that you ask the creditor to report the same to all the credit bureaus.

Once you finish paying all of the past due accounts, and once it is reported as paid and closed, your credit should start to improve.

Since you are worried about your score, let me tell you a bit more about credit scores. The most important step in understanding your credit score is to know what a credit score is and how it is determined. A FICO credit score comes from the Fair Isaac & Co. Three quarters of all lenders use the FICO credit score when considering requests for loans or credit, which is why this is an integral part of understanding your credit score.

Given below is a rough formula used to calculate your score:

  • 35% on your payment history
  • 30% on the amount you currently owe lenders
  • 15% on the length of your credit history
  • 10% on the number of new credit accounts you've opened or applied for (fewer is better)
  • 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)

The best way to improve your credit score is to pay your bills on time and manage your credit wisely. The most important item is your mortgage. Make sure you pay it on time every month in order to maintain a good credit score. Installment loans, where you borrow a set amount to buy new furniture or appliances, for example, are given more weight than credit cards.

Keep your spends well below your credit limits, because your FICO credit score will definitely be lower if you are maxed out on your credit cards. Don't have more than two or three credit cards because a large number of credit cards also lowers your FICO score. Don't apply for several credit cards at one time; it makes lenders nervous and will lower your FICO score. Other factors also affect your score, such as home ownership, which raises it, and moving frequently, which lowers it. Bills.com has comprehensive information about credit scores and articles on how to understand credit scores. You can read more on our credit information page.

I hope the information provided helps you Find. Learn. Save.

Best,

Bill

www.bills.com

Comments (10)


Nizar O.
Scott Twp, PA  |  November 11, 2011
I have old debts from my college years in the US that include a credit card and a hospital bill that i was not able to pay at the time. This was 10 years ago and i would really like to pay off these amounts. Will a credit report help me? if not, whats the best way to go about it. Thanks.
Bills.com
November 13, 2011
I assume that you do not have current letters from your creditors. If you do not, then a credit report would be a good place to review all of your reported credit lines and public judgments.

Read bills.com article about credit reports. This will help you understand about the credit report and how to get one.

Since you have debt from ten years ago, read about the statute of limitations for debt. See if this may apply to your circumstances.
Aimee L.
Port Charlotte, FL  |  May 12, 2011
I have a few accounts which became late in 2007. In 2009 I paid off the debts. Beginning in 2008, I opened some credit card accounts, which i have paid 100% on time and paid more than the amount due. Even though I paid off the old debts, my credit score is still poor. I recently tried to obtain a home equity loan, with 100% equity in my home, a solid work history, and good income. No bank will consider my loan application because of my late payments from 2007, even though all the old debt is paid. What would be the difference in the "amount you currently owe" in a charge off versus paid off situation for an account which had late/missed payments? In other words, in either situation the debt would be removed from the "amount you currently owe", and the "payment history" would remain the same. In my case, I have seen no difference in my credit score by paying off the old debts, so what is the benefit to paying them off?
Bills.com
May 12, 2011
The benefit to paying your debts is to remove the liability you have for the debts, which is reflected in your debt-to-income ratio in your mortgage loan application. As for a credit score is concerned, what your anecdote shows is there is little benefit to your credit score for paying a delinquent debt. The damage is done at the time of delinquency, and is not undone when the debt is paid.
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Aimee L.
Port Charlotte, FL  |  May 12, 2011
The problem I have is, lenders won't even go to the debt-to-income ratio portion of the loan evaluation. Once they review my credit score that's it. Do I just need to wait for the old items to drop off or are there any advocacy groups?
Bills.com
May 13, 2011
Under the FCRA, the Fair Credit Reporting Act, a consumer can dispute incorrect information on their credit report. Some consumers will dispute accurate derogatory information in the hopes that the creditor that reported the derogatory will not respond to the dispute. If the creditor fails to respond, the consumer credit reporting agency must remove the derogatory information.
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Bills.com
May 29, 2009
Karla, as this is a legal matter, it will be best that you consult with an attorney to find out what your options are; I am not one and cannot give you legal advice. You would want to try and avoid any further bank account or wage garnishments. I think you did reset the statute of limitations when you made the recent payment, but yours is a different case as your debt now belongs to a different party. Regardless, you still owe the debt and it is best that you resolve it in a manner that is affordable for you and is acceptable to your creditor. You can approach the court and present your case, and the judge will decide at that point. The fact that you already made a big chunk of the payment should also work in your favor. Again, seek help of a legal professional as soon as possible.
Karla .
May 29, 2009
i had a creit card with anb (associates national bank) i believe back in 1999 the account was closed maybe 1year or so later & i failed to make payment on it in 2/2008 i received a letter for a judgement in court from unifund collection agency sayng that i owed about 7,500...! i have since tried to contact anb only to find they were bought by citi bank and they have no info!! i actually paid 3,400 to unifund only because i was ignorant about staue of limitatios & i think i restarted the clock on the SOL when i paid them...i could not come up with the rest of the money and have to go to court for the judgement against me n because i am fighting the wage garnishment!! i work part time and have 3 children & can't aford 25% less every week!! if i bring forth all this info to the judge will it make a difference now? seeing how old this account is can he change his judgement? i'm so lost!!!
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Bills.com
May 28, 2009
You should check to see if the Statute of Limitations has expired on that debt, this varies from state to state. Read about your state's collection laws. If the statute has expired, then you need not pay this debt, but it will continue to show as an unpaid account until 7 years have passed. If you want to resolve this debt, you should be able to negotiate a lower payoff on the amount due. Being that the debt is so old, the collector will be open to negotiations. Just make sure before you pay anything, that you get an offer letter stating the agreed upon payment, and also that the collection agency will report the debt as paid with no balance due, once you do make the payment.
Karla .
May 27, 2009
my question is i am trying to purchase a home and was a co-signer on a m,obil home that was repoed and sold off in a auction since my dad filled for banckruptcy i am left responsible i contacted the collection agency because i nmeed to show i have paid this in order to move forward with my loan the off set amount is 41,073 & they are asking for $6,000 but this was from 2002 over 6 years ago would i be able to offer them less money realisticly?
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