Impact of Delinquent Debt Payment on Credit Score
More than one-third of Americans have one or more types of debt in collections – which implies they are behind in paying their bills – with the average debt owed by people being approximately $5,178. A delinquent debt arises from missing out a credit card payment or not paying a parking ticket. Failing to meet payments on consumer debts creates a vicious cycle of debt and has a negative impact on your credit score, which partially explains the increasing number of people with low credit scores in Dallas and other parts of the US. In this post by Repair My Credit Now, we discuss the finer lines of the proposition, to help you make an informed decision.
Is paying-off delinquent debt the right move?
Paying off old debts to increase the credit score might seem to be the right strategy, but unless done with expert guidance, it may backfire and reduce the score further. It is, therefore, essential to form a credit repair strategy that involves analysis of every debt and predicting its impact on the overall score.
Walking away from debt isn’t the solution to a problem because sooner or later, it will have an impact on your financial future. Many people in Dallas, Texas are worried about payment of a delinquent loan and its impact on the credit score. The post is an effort to inform individuals about delinquent debt and all the vital factors related to it.
Different payment scenarios and their impact
Payment of old debt doesn’t negate the impact made by delinquent payments on the credit score. It could, however, increase or decrease the current score, which depends on following scenarios:
Paying Off an Outstanding Debt
If there is an overdue credit account and shows an outstanding debt, paying it off improves the credit score. It is, however, not possible to remove the late payments showing on the credit report, but a reduction in the overall amount owed and getting the debt back to current status improves the credit score.
Paying off a Charge-off
Paying off a charge off has a negative effect on your credit score. If an old debt reflecting on the credit report is charged off by the lender, don’t set-up a new payment plan as it could re-activate the debt and make it appear as a recent one. New debt always has more negative impact on the credit score than an older one. When an individual makes full payment of the debt, it is necessary to ensure that the lender removes the charge-off status and the debt shows up as paid in full.
If an individual makes the settlement for less than the total amount owed, it would show up on the credit report and lower the score depending on the way the lender reports the settlement.
Some lenders, for instance, mark the settlement as paid, which has a positive impact on the score and others mark it as settled, which reduces the score.
Paying Off Student Loan or Mortgage
An individual could be delinquent on a student loan, car loan or any other mortgage without any of them reported to a collection agency. A full payment of such debts might not help an individual get away from scans of FICO and VantageScore, but it might not improve the credit score. The credit score may, however, increase by a few points, as scoring systems consider balances on a delinquent account, but there won’t be a remarkable jump in the credit score.
A Few Last Words
An effective way to deal with old debt payment is to start with the ones showing as delinquent, as this gives a boost to the credit score in short-term. Review the older debt showing as charged off and do check the state laws to find out if the debt is statute-barred, before reaching out to a collection agency. If scenarios where the delinquent debt is almost seven years old and might drop off the credit report in coming months, wait till it drops off so that there’s no negative impact on the score.
Although, there are ways to get over the delinquent debts, timely payment of dues and obligations is the safest way to have a consistent and high credit score. to learn more about credit scores and delinquent debt, feel free to get in touch with one of the credit experts at Repair My Credit Now.