How Debt Affects Your Credit Score
Carrying debt affects your credit score in several ways. Carrying a high balance on one or more credit cards lowers your available credit limit and drops your credit score. If you do not pay the debts on time, creditors report your missed payment to the credit bureaus, which lowers your credit score even more. If a debt goes unpaid for six months, the creditor will write off the debt as a charge off and send it to a collection agency, which lowers your score, according to MSN.
Resolving Debts Owed to a Direct Debtor
Paying off an old debt before the original creditor turns the account over for collection will bring your account status to current and stop the creditor from reporting future late payments. It will also bring your overall debt-to-credit ratio down, which increases your credit score.
Resolving Debts Owed to a Debt Collection Agency
Creditors typically sell your account to a collection agency after it goes unpaid. From there the creditor will also report the account to the credit bureaus, giving you a second negative mark, and attempt to get you to pay the debt. You can work with the collection agency to reach a settlement on the debt and pay a portion of the total amount due, or pay the debt in full. The collection agency will report your debt paid. However, the mark will stay on your credit file.
When Paying a Debt Helps Your Credit Score
It is best to pay a debt before the original creditor writes off the account. If the debt has already reached a collection agency, the agency may be willing to remove the collection listing from your credit report entirely or report the account as paid as agreed if you pay the debt in full. You will still have a negative mark on your credit report from the original creditor, but removing or altering the collection agency account will have a positive impact on your credit score.
When Paying a Debt Hurts Your Credit Score
As accounts age, they have less of an impact on your credit score and they fall off the report entirely after seven years. When you enter into a payment plan, pay a settlement or pay in full on an account that is several years old, the creditor will update the account information with the credit bureaus. This will cause the account to become current and have a larger impact on your score, which can actually hurt your score worse then just allowing the bill to age and fall off your report.