Paying Old Debts Can Damage Credit Scores
How the Impact of Bad Debt on a Credit Report Lessens Over Time
Oct 25, 2009
As a debt ages, it has less of an effect on a consumer’s credit scores. Even scores that have suffered due to unpaid debts will gradually recover on their own as the debt is allowed to age. Paying it can impede this process.
Paying An Old Debt Brings the Account Current On a Credit Report
New credit accounts for 10% of the current credit scoring module. Debts and accounts that display recent activity are considered new credit. This is not to say that old debts do not count at all- they do- but not nearly as much.
If an account has sat on a credit report without any activity (such as payment) occurring on the account, the debt begins to age. Before long a fresh debt has become an old debt and no longer has the same negative impact on a credit score that it once did.
If a consumer opts to pay the old debt, however, it ceases to be considered old by the credit bureaus. The old debt suddenly becomes new again and its negative impact on the consumer’s credit score is no longer overshadowed by any new debt the individual has accrued since the original account went delinquent.
Lenders Are More Likely to Disregard Old Debts
Negative trade lines that appear within a credit report will always make the consumer in question more of a lending risk than a consumer with no negative trade lines. Individuals at a higher lending risk face higher interest rates on their loans.
The more recent a debt is, the more weight it will carry with the lender. If an individual defaults on a credit card, but uses good debt management skills over the next two or three years, a lender knows that the individual made mistakes in the past but has obviously overcome those mistakes to demonstrate recent financial responsibility.
If, however, an old debt is paid and updates as recent, it is no longer buried in a consumer’s credit history for the lender to view as something that occurred in the past. Paying the debt brings it front and center for a lender and can affect whether or not an individual is approved for a loan.
Legal Obligation to Pay Bad Debts
Even knowing that paying an old debt could damage their credit score, many individuals are afraid that if they don’t pay, they will be subject to a lawsuit. Fortunately, almost all debts are covered by a statute of limitations that controls how long a creditor can sue a debtor for the debt. Once the statute of limitations for debt collection expires in the consumer’s state of residence, he or she has an airtight defense should any lawsuits occur over old unpaid accounts. Making a payment on the account, however, resets the statute of limitations and reinstates the individual‘s legal obligation to pay the amount owed.
Waiting out a bad debt is usually the best course of action, if possible. In addition to the statute of limitations, most debts are also subject to a finite reporting period set by the Fair Credit Reporting Act. This states that all debts must be removed when the reporting period expires. Expiration of the standard reporting period is seven years from the date the debt was originally charged off.
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