There are a number of factors that combine to make up a person's credit score. These include the person's previous credit history, the length of his credit history and the amount of debt outstanding. In nearly all cases, paying back delinquent loans will raise a person's credit score.
Features
Credit scores are determined by companies called credit reporting bureaus. Using a formula pioneered by the Fair Isaac Corp, these companies examine various factors related to a person's credit history to determine the likelihood that she will pay back a loan. This information is compiled using information sent to the bureaus by debtors. As new information is sent in, a person's score will change.
Significance
If a credit reporting company believes that a person has a relatively high chance of paying off a loan, he will be assigned a high score. People with outstanding delinquent loans are generally considered to be at a relatively high risk of defaulting on a new loan. Therefore, they are generally assigned relatively low scores. Paying off these debts will generally raise the person's score.
Effects
Although paying off outstanding debts will generally cause a person's score to improve, a record of the debts will not disappear from her record. The fact that a person was delinquent in paying back a debt can remain on her record for up to seven years. During this time, it will drag down her overall credit rating.
Considerations
The way in which the person pays off a delinquent loan will also affect the movement of his score. The best way for a person to pay off a loan, at least in terms of its effect on his credit rating, is to pay the full amount owed. The creditor will mark the payment "paid in full" and report this to the reporting bureaus. However, if the borrower negotiates to pay less than the full amount owed, the creditor may mark some of the debt as written off, which will pull down the person's credit score.
Solution
The only real way of healing a tarnished credit record is time and new loans. As a person takes out new loans and pays them on time and in full, their credit rating will gradually improve. A full repair cannot occur until the delinquent loan is removed from the person's record at the end of seven years. But becoming current on outstanding debts and staying that way is the best short-term solution.
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