Healthy Family | Home Safety | Health and Wealth | Relationship Issues | Career Advice | Growing Family
Get the SixWise e-Newsletter FREE!
Google Web
Free Newsletter Subscription
Get the Web's Most trusted & Informative Health, Wealth, Safety & More Newsletter -- FREE!


Share Email to a Friend Print This

Paying Your Old Bills Can Actually HURT Your Credit -- What You Need to Know

Owing money--for credit card bills, mortgages, student loans and everything in between--has become the American way. In all, American consumers owed nearly $2 trillion as of October 2003, according to the Federal Reserve.

When you break this down, that's over $18,500 of debt for the average household--without a mortgage. In fact, about 43 percent of families spend more than they earn each year, and the average household has $8,000 in credit card debt alone.


When it comes to paying debt, "It seems so easy, but it's not," says Steve Rhode, a private money counselor and co-founder of a Maryland-based credit-crisis counseling firm.

Accounting 101

The equation seems relatively simple. Spend more than you earn, and you accumulate debt. When you have more money coming in (or fewer expenses), you put that money toward paying off your debt, your credit score improves, and all is well.

In reality, however, it's not nearly this simple. Creditors and collection agencies are sneaky, and there are all kinds of games going on that complicate the process of getting out of debt. Morally, it may be the right thing to pay off an old debt, no matter what, but financially, this is not always the case. Here are several circumstances when paying off a debt can actually hurt your credit.

Statute of Limitations

Every state has a statute of limitations that limits the amount of time a creditor has to sue you for a delinquent account. This can range from three to 15 years, but generally most states set it at five or six years. However, it is possible to accidentally extend the statute of limitations just by calling a creditor to inquire about an old debt, or by acknowledging that the debt is yours. These rules vary by state, so be sure to find out your own state's laws on the matter.

Another useful bit of information is that bad marks on your credit report can only be reported for 7.5 years (10 years for bankruptcies). After that, they fall off your record, so paying off the debt won't affect your credit score.


Should you pay your past debts? "If you can afford to pay, pay," says Rhode. "Too many people live and die by what their credit report says."

Charge-Offs: When it's Beneficial to Pay Up

After six months of no payments, a creditor can write off your account as a bad debt. This is called a "charge off," and is bad news for your credit score. The creditor will usually then turn the account over to a collection agency, and you'll have two separate entries on your credit score for the same debt.

What really matters for your FICO credit score (the one used by most lenders) is what the original creditor entry says. If your entire balance is there, paying off the collection agency and then contacting the original creditor to zero out your account may improve your credit.

But, if the original creditor entry shows a zero balance (because it was transferred to collections), which is often the case, there will be no improvement to your credit score--even if you pay off the debt.

Degunk Your Personal Finances

Degunking Your Personal FinancesLearning how to take control of your financial life, eliminating stress, and achieving your goals is possible, and quite easy to achieve, with the help of a simple, proven, 12-step plan explained in the very informative new book, "Degunking Your Personal Finances." With this book, you will:

  • Create and understand your current financial situation. (chapter 4)

  • Learn a quick and easy way to manage your monthly bills. (pgs. 29-37)

  • Find out how much you spend and where your money goes. (Chapter 11)

  • Use the proven formula that will ensure elimination of credit card debt. (pgs. 100-101)

  • Become familiar with ways to invest for the future and improve your financial security. (Chapters 16 & 17)

  • Build your savings. (Chapter 9)

  • Gain true knowledge on home mortgages -- fixed vs. adjustable rates. (pgs. 123-127)

  • Familiarize yourself with your credit report and drastically improve your credit score. (Chapter 10)

  • Understand how to put strategies in place to help you cope with unexpected events that can leave you financially burdened. (Chapter 17)

  • Get useful tips on how to save on clothing, vehicle purchases, vacations, home repairs. (Chapter 12)

  • Find hidden money -- these amazing tips are worth the price of the book alone! (pgs. 256-269)

You don't have to put it off another day -- learn more about "Degunking Your Personal Finances" now!

Settling Old Debts

While settling an account for less than what was originally owed may seem like a good idea, and will appease the creditor, it can actually hurt your FICO score.

"Settling the account can add a new element to its record at the bureau. Since that element's date would be more recent than the original item, it can end up lowering the score," said Craig Watts, spokesman for Fair Isaac Corp., the creators of the FICO credit scoring system.

In this case, it might be better to leave the account open and unpaid. Further, if you do settle, another collection agency may still contact you and try to collect the unpaid portion. Or, the collector could tell the Internal Revenue Service that you've received "income" from the settled debt--income that you'll owe taxes on.

Paying on Old Debts

The more recent the debt, the greater its impact on your credit score. If you have an old debt, then decide to make a payment, it could update the delinquency, making it look more recent. The end result? A lower credit score.

If you want to know more, the Federal Trade Commission has a brochure that outlines the basics of fair debt collection and consumer rights that everyone needs to know.

Recommended Reading

How to Get the Greatest Tax Advantages by Donating Money to Charity

The Six Debt Triggers for Women


When Paying Bills Can Hurt Your Credit

MSN Money: How Does Your Debt Compare?

Zombie Debt Collectors Dig Up Your Old Mistakes

12 Tips for Negotiating with Debt Collectors

To get more information about this and other highly important topics, sign up for your free subscription to our weekly "Be Safe, Live Long & Prosper" e-newsletter.

With every issue of the free newsletter, you’ll get access to the insights, products, services, and more that can truly improve your well-being, peace of mind, and therefore your life!

Share Email to a Friend Print This