Paying Old Bills and Your Credit Score

The meaning of the term “charge off” confuses many debtors. Some individuals assume that once an outstanding bill is charged-off they no longer owe the outstanding balance. However, a charge-off status does not mean that the unpaid bill is forgotten, forgiven, disappears or is no longer collectable.

Many creditors write off delinquent and unpaid accounts between 180 and 240 days from the date of last payment. The term charge off is a bookkeeping declaration that creditors and financial institutions use to notate that an outstanding delinquent balance will likely never be paid by the consumer. As a result, the creditor has moved an outstanding balance from an active accounts receivable status to a bad debt ledger. For the debtor, the term means that the written off status of the account will likely appear as a negative entry on their credit report and can vastly lower their overall credit score.

To maintain the highest credit rating, it is best to pay all your bills in a timely fashion. However, confusing medical bills, unexpected home repair expenses, errors in judgment and simply overlooking a financial obligation can prevent the establishment of a good credit score. Once a delinquent bill receives a charge off status, the entry will remain on your credit report for a maximum of seven years from the date of last payment.

Although it is admirable to fulfill your financial obligations, if you are trying to rebuild your credit, paying off old bills can hamper your efforts. As an unpaid bill ages, it has less of an impact on your credit history than more recent activity. When attempting to repair your credit it may be best to focus on newer outstanding bills. Delinquent debt less than four years old is sometimes the most damaging to your credit score. These types of bills should have a higher payment priority.

Surprisingly, paying on older bills could adversely affect your credit repair efforts and even cause your overall score to plummet.

Many people assume that a bad debt will drop from their credit report after seven years. However, that is not always the case. For example, if you have a bad debt that is 6-years and 11 months old and you pay the balance or even make a payment, the 7-year clock may reset with a brand new “last activity” date. In this case, the payment could extend the life of a derogatory entry on your credit report rather than working to repair your credit. Had you done nothing, the harmful information would have simply dropped off your report 7-years after the original charge-off date.

Moreover, Fair Isaac Corporation, the company that provides the credit scoring formulas behind the FICO Score that practically every lender uses to qualify new credit applications, doesn’t award a single point for paying off a collection or charged off account. Rather, fair or not, it’s the mere presence of such an account, without regard to its ultimate payment status, that lowers the credit score.

Regardless, it’s important to remember that the 7-year maximum credit reporting timer isn’t the only relevant “clock” to consider when deciding whether or not to pay a collection or charge off. Each state has its own statute of limitations for either collecting a debt, or bringing a civil lawsuit to court, or both. Moreover, certain mortgage brokers may require that all outstanding charged off accounts be paid before even considering an application, even before they consider the credit score. In other words, the decision to pay or not to pay may be influenced by several factors.

Finally it’s worth mentioning that a credit repair law firm can leverage one or more consumer protection statutes, like the Fair Debt Collections Practices Act, in order to demand that credit companies substantiate every detail of the credit reporting associated with a charge off or collection account. Even if the original debt was incurred by a consumer, if an original creditor or third-party debt collector has failed to protect a consumers lawful rights every step of the way, the associated credit reporting may be deemed invalid and must be removed.

On the backdrop of the recent recession, you may want to address lingering credit report problems. Lexington Law Firm can assist you with this process without further damaging your credit repair efforts. Our proven results and innovative services may help you reach your credit goals. Acting as your advocate, we can mitigate many of the credit repair roadblocks created by original creditors, bill collectors, and credit bureaus. Moreover, our services are affordable. Get started with a free credit consultation today.