|
Paying Your Old Bills Can Actually Hurt Your Credit -- What You Need To Know
By: B. SixWise
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.
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.
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.
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.
About the Author:
This article was provided by the world's #1 most popular and trusted holistic
living e-newsletter -- FREE to you right now at http://www.SixWise.com! The old
way of thinking: "holistic living" pertains only to personal health. The new way
of thinking: "holistic living" means prevention of the negative and adherence to
the positive in all SIX practical areas of life: relationships, finances,
career, home environment, safety and health. With the SixWise.com e-newsletter,
you will get holistic wisdom from the world's top experts in all six of these
areas -- completely FREE with a simple sign-up (and a guaranteed no-spam
policy!) at http://www.SixWise.com. |
