Old debt and your credit score
So you’re taking a look at your annual credit report (You are getting it right ever year right? Tsk Tsk, Get your free annual credit report) and you see an old debt that you didn’t pay off a few years back. It’s relatively low cost and looks like an easy thing to correct. Before you reach for your check book - think again.
Liz Weston talks about a scenario where someone decides to pay off an old debt, and her score actually went down by 95 points. Liz also mentions things to look out for when messing around with payment plans and old debts.
“Thanks to the sometimes bizarre quirks of credit scoring, state statutes of limitations and the federal Fair Credit Reporting Act, consumers can’t always assume that paying off old debts will improve their financial situation or make them a better risk in lenders’ eyes. Add in the tactics of some unethical collection agencies, and you have a real quagmire.” - See MSN Money’s article When Paying Bills Can Hurt Your Credit Score
What was strange to me while researching this is that there is a nicely worded post on Yahoo Answers by contributor “echo” which goes very quickly to the point. Don’t pay a collector unless you have verified that they can even collect or charge you any money:
“If it is with a collection agency, send a debt validation letter first. Make sure that they have not illegally inflated the amount, that they are licensed and/or bonded to collect in your state if your state demands it, that they even have the legal right to collect on that debt (it’s not unheard of for a collection agency to try and collect a debt they have no legal right to collect on)” - See this Yahoo Answers post Will paying off old debt improve my credit score?
From personal experience, paying off old debt did not help me at all. In fact, I experienced a lost of 1-2 points. But it could’ve been more as I was paying down debt as well, so it may have impacted a lot more than that. In the end, I would not go back and pay the 4 yr old debt even though it was only $49. If that debt had been $490 instead, I’d be more upset over a loss in credit score points.
What I recommend doing is not risking it, pay off all of your current debt. Your credit cards, your auto loan, your mortgage, then and only then, look at your credit report and get rid of the old debt. Of course, at that point, your credit score doesn’t really even matter that much because you have no debt, and no mortgage, rent, car payment, credit card payments and can just go out and buy things out right instead of relying on your credit.