If Something Goes on Your Credit History & You Pay it, How Does it Affect You?

Your credit history reflects your entire experience with debt. When you make payments late or skip payments altogether, subsequently paying the debt may not positively impact your credit score immediately. However, over time, it will help, assuming all items remain paid on time. If you have not already paid off a problem debt, there are steps you can take to lessen the damage.

Check Your Credit Report

Everyone who establishes credit can obtain a free copy of his credit report once each year through AnnualCreditReport.com. You can get copies of your credit report from all three major credit reporting agencies: Equifax, Experian and TransUnion. You also can obtain these directly from the reporting agencies for a fee. If you detect any errors on your credit report, such as a debt you paid that is not reported as paid, you can file a dispute with the credit bureau or the creditor. Having inaccurate negative items removed from your credit report will improve your credit score.

Contact

Try to arrange to pay off debts if you are contacted by the creditor's collections department or a third-party collection agency. If you are contacted, it usually means the creditor took a charge-off on your debt, or wrote it off as uncollectible, which typically occurs after the payments have been missed for an extended period. A charge-off is one of the worst stains on a credit report, aside from bankruptcy. A charge-off does significant damage to your credit score.

Advantages

The advantage of direct discussions with the collecting party is that you sometimes can negotiate a deal to pay less than the full amount to settle the debt. If an agreement is reached and you pay the agreed-upon amount, the collection party will list the payoff as "paid as agreed" or "settled." The latter designation hurts your credit score, while the former favorably impacts your credit rating. You can request that the creditor report the payment as "paid as agreed" as part of your negotiation, although the creditor may not agree to do so.

Unannounced Payoffs

You may decide to pay off a problem debt in full without making contact with the creditor or credit collection agency. That helps your score, especially if you make on-time payments thereafter. The Fair Isaac Corporation (FICO), whose credit scoring model is the most widely used in the United States, reports, "The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won't haunt you forever." Items drop off your credit report after seven years, except bankruptcies, which remain for up to 10 years.