How Will Paying a Delinquent Account Affect Your Credit Score?

When you get more than 30 days behind on debt payments, whether they are car loans, credit cards or mortgage payments, the default is almost always reported to the three main credit bureaus. These derogatory reports negatively affect your credit score for a period of seven years. This is true whether the delinquent account is ultimately paid or not. Paying your account will have a more positive impact on your score than leaving it unresolved. In the short term, however, it won't improve your score. If the debt has been written off by the company, you should consult a lawyer or credit counselor before paying, as the payment could reactivate the debt and actually hurt your score.

Understanding Your Credit Report

Creditors report debt and repaying information, both good and bad, to the three main credit bureaus: Equifax, TransUnion and Experian. Each company maintains a report on each debtor, and these reports will be viewed by future potential lenders to tell them what kind of a credit risk you are. Payments on most debt that is over 30 days old are reported to the bureaus. Each delinquency affects your overall credit score and lowers it. Your credit score determines whether you can apply for new debt and the interest rate on that debt. As an account becomes more delinquent, it has more of a negative impact on your score. Payments on these overdue amounts will also be reflected and will increase your score slightly, but it will take time for the age of the delinquency to lessen the impact on the report.

Negotiating a Settlement

Once accounts are seriously delinquent and already reported to the bureaus, you may be able to work out a settlement with the lender to reduce the total amount owed and the interest rate. The company's main goal is to recover at least some of its money and the company often is willing to settle for less. Before discussing a settlement with your lender, you should comb through your budget carefully to make sure that you can faithfully make the regular payments to which you will be committing. If the lender agrees with your proposal, a legal settlement will be drawn up and noted on your credit report.

Adding Notes to Your Credit Report

If your delinquency was caused by an illness or other unforeseeable event, you are allowed to make notes in your credit files so that lenders will see the reasons behind the delinquent reports. This can sometimes make a bad report seem less risky in a lender's eyes. While each lender will look at the same score, each will interpret it differently and will assign greater or lesser importance to each item.

Monitoring Your Credit Report

Keeping your credit score healthy means monitoring it regularly. You are allowed to have one copy of your credit report annually for free. Make certain that you agree with everything reported. If there are errors, you should report them to the bureaus along with any proof you have to back up your claim. For example, if an account is still shown as outstanding and you paid it, provide copies of the payment receipt to the bureaus and they will correct it.