What Happens to My Credit After I Pay Off Old Debt?


In our Ask an Advisor series, members of Grow’s Financial Advisor Panel answer your money questions each week. Today, CFP Pamela Capalad, founder of Brunch & Budget in Brooklyn, N.Y., explains how paying off old debt affects your credit score. If you have a question for our advisor panel, submit it here.

Q: Will paying off an old debt that’s in collections help or hurt my credit score?

Paying off old accounts that have gone to collections can be a good idea because it lowers the total amount you owe—which counts for 30 percent of your total score—and it shows lenders that you make good on your debts. But for this to benefit you, it’s important to make sure payment is properly noted on your credit report.

First, get a record in writing of your settlement with the collections company. Then monitor your credit report for the next few months, using a tool like CreditKarma or CreditSesame, to make sure the debt is marked as paid off or paid as agreed. If you don’t see that distinction, you can dispute it with each of the credit bureaus by submitting your proof.

You can also attempt to negotiate with the lender or collection agency to remove the collections from your report altogether after it’s been paid, which should increase your credit score. Otherwise, it’s difficult to tell how much of a bump you’ll see from settling an old debt. Generally, collections and other negative marks remain on your credit report for seven years, even if they’ve been paid off. However, the latest models from VantageScore and FICO—VantageScore 3.0 and FICO 9—discount collections debt after it’s been paid. The only problem is that not all lenders are currently using these versions when making decisions.

One last thing to note: Be careful when it comes to older debts on your credit report (which carry less weight than newer ones) that are nearing the seven-year mark. New activity, including partial payments, can reactivate the account and reset you to the beginning of the seven-year time period.

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