Paying your debts may be the right thing to do, but it can be a bad idea when it comes to your credit score. Paying off old debts or settling a debt for less than the amount owed may get creditors off your back, but the ramifications to your credit report may be worse than the hassles with creditors.
Define Settlement
When it comes to your credit report, it's important to understand what settling means. If by "settling an unpaid bill" you mean paying it in full, that can help your credit score. Debt "settlement," however, means something vastly different for both you and your credit score. For you, it means settling a bill for less than you owe. For your credit report, it means bad news.
Debt Settlement
Settling an unpaid bill for less than the amount owed may satisfy the creditor you owe, but it will not satisfy future creditors and won't help your credit score.
A debt settlement may seem like the best way to satisfy creditors or collection agencies, but a settlement hurts your credit score in more ways than one. It is often marked as a debt settled for less than amount owed, which tells potential creditors you cannot be trusted to pay debt in full. And because any activity on an old debt "re-ages" the account, it makes old unpaid debts appear more recently on your credit report.
Full Payment
Paying an old debt off in full may seem like a sure fire way to make creditors happy and improve your credit score, but that's not always the case.
If the debt is being reported with a balance attached, paying it off may help your score. However, if it's being reported as a "0" balance, or is being reported by a collection agency, paying it off may not do as much to help your score.
Who's Reporting
As if paying unpaid bills were not confusing and difficult enough, there's another factor to consider--who's reporting the debt.
MSN Money's Liz Pulliam Weston explains: "What matters most is what the original creditor says on your credit report. The status and amounts owed shown on that entry will figure more heavily in your credit score than what a collection agency reports."
In other words, repaying a debt may only help your credit score if you're repaying the original creditor. If the debt has already gone to a collection agency, repaying the debt may or may not help you at all.
Considerations
If your credit report is full of charge-offs or unpaid bills, debt settlement may seem like a good option. If you choose to go the settlement route, Weston offers this advice: "As part of your negotiations, push to have the creditor or collection agency either stop reporting the account altogether or demand that the account be reported as 'paid in full' rather than 'settled.'" Doing so may not improve your score, but is less likely to damage it.
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