How Much Can a Credit Score Rise if I Pay an Old Debt?

Strangely, sometimes the best decision for your credit score is to not to pay off an old debt, even if morally right. You may not even have a legal obligation to pay it once it reaches a certain age. Any potential points you can get from paying an old debt is probably less important than the fact that you reaffirmed your responsibility to pay it.

Considerations

It takes years of good payment history and keeping debt low to build a good score, but a single missed payment or collection account can damage your score for years. If you are late by more than three months, paying probably won't raise your score by more than a few points. If it goes to a collection agency, paying it off will have no effect on your score.

Potential for Harm

When debts are years old, paying them off causes damage to a credit score, because credit reporting companies can only list them for seven years. Reaffirming an old debt brings the payment status to current and renews the clock. Paying a collection account of any age used to hurt a credit score, but modification of the FICO formula in 2008 changed this. Also, states put statutes of limitations on most debts, usually from three to seven years, so you may not even have liability on an old debt.

Paying Old Debts Has Some Benefits

Some lenders, usually mortgage providers, refuse to approve a loan application until the potential borrower pays off any outstanding debts. Even if a lender does not require an applicant to pay off collection accounts, doing so could be a good way to show high moral character and willingness to pay any debt. You can ask your loan officer what course of action the bank would like to see on a collection account.

Tip

You can negotiate with a lender to get a collection account taken off your record by paying back the old debt, but this tactic is much harder than in years past, because credit reporting agencies are aware of this tactic. Some collection agencies cannot report to the major rating companies due to abuse of account deletions. However, it cannot hurt to at least try to negotiate to remove the account.