Will paying off an old debt raise my credit score?
Not always. If a debt is less than seven years old, paying it could improve your credit score, IF it is showing on your credit report. How much depends on how old the debt is.
If the debt is older than seven years, by law it should have already come off your credit report. The credit rating agencies should not be considering it in assigning your score, so repaying it would likely have no effect on your score.
If the debt is less than seven years old, but is not showing up on your credit report, paying it off will not help your score, AND COULD EVEN HURT IT. This could happen if the creditor reports the payment, since your credit report would then show a debt that was formerly delinquent.
So, if you are thinking of paying off old debt, it is important to prioritize:
FIRST PRIORITY: Tax debt. Tax debts to federal, state and local governments accrue penalties and interest at an astounding rate. And, the government has multiple ways of collecting the debt that are not available to general creditors, such as seizing your tax refunds or government benefits, levying on your wages, and seizing your property.
SECOND PRIORITY: Child support or alimony obligations, and any other obligations you incurred as part of a divorce settlement. These debts are not dischargeable in bankruptcy, and failure to pay can even land you in jail.
THIRD PRIORITY: Any creditor that has sued you and obtained a judgment. A judgment will normally constitute a lien against your property, and may give the creditor the right to garnish your wages or bank account.
FOURTH PRIORITY: Any debt upon which you have been served court papers, even if a judgment has not been entered. If you have been served, a judgment is likely in the near future.
FIFTH PRIORITY: Debt that has been handed over to a law firm for collection, especially if it is a local law firm. A collection lawsuit is much more likely to be filed by a law firm than a general collection agency.
SIXTH PRIORITY: Other debts that are showing up on your credit report. Pay the newer debts first, as these affect your credit score more than older debts.
SEVENTH PRIORITY: Other debts that are not showing up on your credit report.
If it is not possible for you to deal with your debts in this way, it may be time to look at your bankruptcy options. STEER CLEAR OF THE DEBT MANAGEMENT AND DEBT SETTLEMENT FIRMS THAT YOU SEE ADVERTISING EVERYWHERE. The statistics are clear that these services rarely solve debt problems. More often, they are the only ones who get paid, leaving you further in debt and further behind.
Other Frequently Asked Questions:
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- Will paying off an old debt raise my credit score?