Will Paying Three-Year-Old Debts Increase Your Credit Score?

Once you get behind in payments on credit cards, loans or other debt, your credit score will decrease when the delinquency is reported to the credit bureaus. Paying off your old debt, however, can have a negative impact on your credit score in certain situations. While the exact formula used to calculated credit scores is a secret, there are several common repayment situations that can impact your score.

Setting Up a Payment Plan

If you have a three-year-old unpaid debt on your credit report, the impact of the delinquency decreases the older the debt gets. Newer defaults are weighted more heavily into your credit score than older ones. Setting up a payment plan with a creditor sometimes shows up on your credit report as a new event and can hurt your credit score. Fair Isaac, the company that created and manages FICO, the main credit score used by lenders, is working to remove this anomaly from credit scores. Until that occurs, setting up a payment plan for an old debt may drop your score.

Re-activating a Charge Off

After six or more months, most companies charge off a payment owing as a bad debt. At this point, they may turn it over to a collection agency to further pursue collection or they may stop trying to collect it. The fact that the company has written off the debt does not mean that you do not owe it any longer. However, if an old debt is showing as charged off with a zero balance, contacting the company and even paying the debt may re-activate it on your credit report. The balance owing may re-appear and any payment may make the debt appear more recent than it is. This can lower your credit score.

Settling for Less Than You Owe

After a long period of delinquency, a lender may be willing to take a chunk of cash as full payment of a debt rather than \getting nothing. However, settlements for less than the full amount of the debt are recorded with the credit bureaus and have a negative impact on your credit score, even if the company shows a zero balance on the debt.

Re-starting the Statute of Limitations

Each state has a statute of limitations that limits the time period that a lender can pursue collections on a delinquent debt. This period of time can range from 3-to-15 years. If the lender has not heard from you when the statute of limitations runs out, they write off the debt and can no longer attempt to get you to pay. If you contact them, however, you can re-start the clock on the statute of limitations again and they can resume collection efforts and re-activate the debt on your credit report. If the statute has run out on your debt and you still wish to pay it, wait until you have the entire payment amount before contacting them.