This is a common question, as well as a common misconception. The short answer is “no”, paying off old debt does not hurt your credit score. It also doesn’t improve your credit score that much either. Here’s why..
Once a debt hits the 180 days past due mark, it is recorded on your credit history and carries forward as a negative mark for 7 years. Nothing you can do will remove this prior to that 7 year expiration, so in effect the damage has already been done. Paying off that debt is the responsible thing to do, but you won’t be rewarded with a higher score for doing so. It does look better to lenders that you paid it off however, no matter how long it took.
So for debts 180 days past due, it’s better to pay them than not but don’t expect a big bump in your score for doing so.
The underlying reason for this is that creditors weigh your ability to remain current with your bills more than your ability to pay them back eventually. The better way to improve your credit score is to remain current on your debt and pay your bills on time. If you’re just focusing on paying off debt and some of it is past 180 late, then start at the most recent or current debt and work your way back, paying off the 180+ days late debt last.
Here’s an accompanying video clip in which Farnoosh Torabi, Jean Chatzky and David Bach field this question and more. (feed readers may need to view the complete post to see the embedded video)
The credit report you get from freecreditreport.com is no longer free, no matter what that Web address promises.
I say it’s silly because the credit report you get from freecreditreport.com has never been free!
It’s always been a trick to get you to sign up for Experian’s triple advantage credit monitoring program at a monthly cost of $14.95. That’s just shy of $180 a year!
Of course, the reason this is so heinous is because you can get a truly free credit report from all 3 bureaus once a year (using AnnualCreditReport.com), and if you stagger those reports – 1 every 4 months – you can monitor your credit yourself for nothing!
The gist of that NYT article is that freecreditreport.com is now charging $1 for the credit reports in addition to requiring enrollment in credit monitoring. It’s all due new FTC rules:
The new F.T.C. rules went into effect on April 2, and they required sites to include a prominent notice across the top of each Web page that mentioned free reports declaring that the only authorized source under federal law for such reports is annualcreditreport.com.
Rather than include such disclosures, Experian added the $1 charge, saying that “due to federally imposed restrictions, it is no longer feasible for us to provide you” with a free credit report. And now that the report costs $1, the new F.T.C. rule would presumably no longer apply.
A lot has been written about the importance of your credit score, but how important is it really?
It all depends on what you’re doing in your life at any given time. For example, if you’re thinking of buying a home in the next few months, then your credit score is extremely important because it will be a major factor in how much it will cost you to borrow the money for a mortgage. Likewise if you’re looking to buy a new car.
But if you aren’t applying for a new loan or credit card soon, is it really important?
It could also be important if you’re looking for a new job or shopping around for car or homeowner’s insurance. Prospective employers and insurance companies have been known to use credit scores as one of the criteria for judging new hires and new customers.
So, clearly having a good credit score is important, but sometimes people just get too carried away with monitoring it. It’s important, but is it worth the money to check it unless you’re applying for a loan?
I don’t think so. In fact, I don’t even think it’s important to check your credit score even if you’re applying for a loan. Here’s why:
Your credit score is based on the information in your credit report.
You can get a basic idea of your credit score for free.
You can’t really do anything about your credit score that you wouldn’t do about your credit report.
You can get your free credit report from AnnualCreditReport.com and see if your financial history is good, bad or just plain ugly. You can use BankRate.com’s FICO® Score Estimator to get a general idea of how you rate. But consider this – If you paid to find out your credit score was low, you’d have to get your credit report anyway to find out why, and refute any erroneous information. Why not just check your credit report and leave it at that?
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