You've scrimped and saved, and thanks to that big bonus you just received, you finally have enough money to pay off all your previous debts. As you ponder on which creditor to call first, take a few moments to ponder on how paying off your debts would affect your credit rating.
Although settling outstanding accounts should raise your credit standing, thanks to bizarre external factors such as state statutes of limitations, credit scoring, unethical collection practices and federal acts, doing what is right may actually bring you more harm than good.
Yes, strange as it may seem, it is possible. Truth, after all, is stranger than fiction, right? But this does not mean that you should forego paying you (long) overdue accounts. No. You must still pay your dues, and when you have done so, you have to exert a little effort to make sure that you won't be a victim of the system.
Pay Off Delinquent / Charged Off Accounts and Follow Up
Six months after you stop paying a creditor, the lender will write it off as a bad-debt and this will be reported to credit agencies. Having your account classified as a charge-off does not relieve you of your duties. You still have to pay and the creditor can still go after you for payment.
Ideally, when you pay, you should remit the money directly to your creditor and not to the collections agency. The primary reason for this is the fact that your FICO (Fair Isaac & Company) rating will depend on the original balances (those reflected on the statements of your lenders), and not on the papers of collection agencies. Paying the collections agency will do nothing for your FICO status
In addition, when an account is handed over to a collection agency, you will have two records on file. If you pay off a debt with the primary creditor, your "bad-debt" entry will be erased, but unless you call the collection agency to update their records, your "collectible" status in their file will remain as is. So don't just rely on the creditor to give collection agencies an update on your payment, you should take it upon yourself to clear your name.
If you have paid through a collector, try to get in touch with the lending institution and inform them that you have settled your debt. Afterwards, ask that your account be considered closed so the updated status would be reflected in your succeeding FICO ratings.
Pay in Full, not in Installment
Odd as it may sound, this little bit of advice is sensible. When you remit a portion of the total amount you owe, although you make your creditor partially happy, this move will raise red flags on your FICO score. FICO ratings are dependent on how "old" your accounts are. By partially remitting payment to settle your account, your delinquency record will be updated. You may have paid but since you did not pay in full, your account is still considered active thus lowering your credit rating.
In addition, when you have remitted your payment, make sure that their records state that you have "paid in full" and not just "settled" the debt. These two terms have different meanings and affect your credit ratings in different ways as well.
If paying in full is simply out of the question, talk to your creditor and ask for reasonable payment terms. Your creditor should be more than happy to discuss this with you.
Pay Your Bills Promptly
Bad credit marks can affect your credit standing for years on end. Generally, banks and credit reports have a life-span of 7½ years after your last payment. After this time, your record will be deleted. Unless you're an unscrupulous and very illogical person, you would not want to waste 7½ years of your life evading collectors just so your account could be deleted. If you manage to hide from your creditors for this long, you may not be lucky if the state decides to run after you.
The statue of limitation for contracts (loans, for example) varies from state to state. A creditor may sue you for a delinquent account long after your bad record has been removed from any credit rating institution. To avoid facing more problems, just settle your bills as promptly as possible
The risk of having a less-than-desirable credit rating should not be used as a reason to run away from these previous debts. You should, by all means, pay off all your creditors, not for the improved credit rating, but for your own sake and personal peace of mind.
