Does Paying Off Old Debt Improve a Credit Rating?

Time and responsible actions are the only sure ways to improve your credit rating. With the exception of rapid re-scoring to correct errors and/or inaccuracies in your credit report, there is no quick or easy way to accomplish this task. Understanding that old debt is always bad debt, paying it off can have a positive effect on your credit rating.

The Facts

Old debt remains in your credit file for seven years from the date of the first delinquency report, which usually occurs when the account becomes 180 days past due. Whether or not you pay the debt, credit bureaus must remove this information when the seven-year time frame expires. However, in the meantime, old debt affects your credit score; and whether the debt is a credit account charge-off, collection agency account or a legal judgment, anyone reviewing your file will have access to this information.

Effects

As part of your credit profile, old debt affects your credit score in two ways. First, it affects your payment history; second, it adds to your overall debt load. Payment history is a record of whether you pay bills on time, pay late or do not pay. Your overall debt load is a measure both of how much debt you carry in total, and as it relates to the amount of your available credit. Together, these two factors count for 65 percent of your credit rating.

Results

Paying old debt will help increase your credit rating, although how quickly depends on a number of factors. The older the debt, the less effect it has on your credit rating and the less your score will increase by paying it off. In addition, until and unless you pay the debt in full, credit bureaus consider you a high risk. As a result, you may not see your credit rating improve until you do pay the debt in full. Finally, if old debt is all that is in your credit report, your score will not improve as much as if you also apply for and use new credit responsibly.

Considerations

Even though old debt may fall off your credit report after seven years, it remains your responsibility until the debt statute of limitations for your state expires. Any payments you make on the old debt starts the time frame for the statute of limitations over again. Understand that until your responsibility for the debt legally expires, creditors have a right to try to collect the amount whether or not it is part of your credit report.