Your credit score includes information about your credit management and lenders review your credit report when evaluating applications for new credit. However, inactive debts only remain on your report for seven years. If you have outstanding debts on your credit report that you were unwilling or unable to settle, your credit score may increase when these debts are no longer included in your credit report.
Reporting
Creditors typically submit consumer reports to the credit reporting agencies about once a month. These reports include information pertaining to your account balances and payment history. Banks and merchants can also report noncredit-related information to the credit bureaus such as unpaid medical bills, overdrawn bank accounts that were charged off and never settled and delinquent bills for services such as satellite or cable TV. If you declare bankruptcy, that event remains on your credit report for up to 10 years whereas other debts and credit events are removed seven years after the last account activity.
Scoring
The three national credit rating agencies, Equifax, Experian and TransUnion, all use different formulas to calculate your credit score. However, all three base your score on your payment history, your level of debt as a percentage of your available credit and other factors such as the frequency with which you apply for new credit. If you miss a debt payment by more than 30 days, it harms your credit score. If you fail to pay a bill at all it can severely damage your score. However, if you have debts, but pay your bills on time, the positive payment activity helps your credit score.
Account Removal
Credit scores are heavily tilted to recent account activity rather than past credit activity. Therefore, debts have very little impact on your score as the seven-year mark for removing information from your credit report approaches. Paying your current liabilities on time will probably help your credit score more than will removing a payment that was late six or seven years ago. Additionally, your score only improves if you improve your credit management habits. If you continually make late payments, the removal of a 7-year-old debt will not impact your score.
Considerations
People who utilize different types of credit tend to have higher credit scores, assuming they pay their bills on time and keep account balances fairly low. Therefore, if you stop using credit, your credit score could decrease over time as fewer and fewer positive accounts are listed on your report. If you close credit cards that have zero balances, this can also hurt your score because it raises your overall level of credit utilization. Therefore, debts disappearing from your credit report can both help and harm your score.
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