Reporting
When you stop paying a debt and it becomes delinquent by at least six months, the creditor may decide to charge it off. If this is done, it becomes a bad debt and will be reported on your credit report with the three major credit bureaus. Anyone who reviews your credit report will be able to see the date and amount of the bad debt and the fact that it was not paid. This will hurt your credit report and bring down your credit score.
Paying
A bad debt will not automatically be removed from your credit report if you decide to pay it off. Instead, its status will change to a "Paid Charge-Off." This will help your credit file, but only in a very minor way. The fact that you had a bad debt will still show up for the legally allowed time (usually seven years). This still pulls your credit score down despite the fact that you paid it off.
Negotiating
If you negotiate with your creditor before you pay off a bad debt, it can help your credit file significantly. You can offer to settle with the creditor and pay the debt in exchange for having it removed from your credit reports. Get this agreement in writing before making the pay-off so you can force the creditor to follow through if necessary. If you paid in exchange for having the bad debt removed from your credit file, you will help it and your credit score will go up significantly.
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