How does paying off credit debt improve your credit score?
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My credit is very bad because of many credit card defaults from when I was a student. I currently have 6 charge offs on my report that have all gone to collection.
Finally, two years ago I’ve decided to take matters into hands and pay of my debts. I made agreements with all creditors. Four accounts were settled for 30%-65% lump sum, and the remaining two accounts are paid in monthly installments.
My current credit score is below 600. I had expected it to go up by now, but it didn’t move an inch. How long doe’s it take your score to re-bounce after paying delinquent accounts?
Paying off delinquent accounts doesn’t improve your score
Paying off collection and charge off accounts does nothing to your credit score. The damage is done and paying of the debt will not improve your score or erase the negative credit history.
Delinquent account age off your credit report 7.5 years from date of first delinquency. This is per the FACT Act. However, since Fico score are 90% based on the previous 24 months credit activity, by the time the items age off your report they hardly have any effect on your score.
The fact that you have a score around the 600 mark means that the items’ effect on your score diminishes.
To improve your score you need to re-establish good credit. This means 24 months of timely payments. If you have a credit card, start using it for regular purchases, wait for the statement and pay the balance in full every month.
If you currently don’t have an active card, you won’t be able to get a regular card. Apply for a secured credit card, and start using it moderately.
This doesn’t mean that you did anything wrong. Collections companied tend to sue just before the statue of limitation. In many cases they get a judgment, and then the damage is much worse.
Another good reason to pay/settle collection accounts is that when potential creditors look at your report, they want to see that all past problems have resolved. A paid/settled account looks much better than an un-settled collection.
Lastly, paying collection in monthly installments is particularly bad. They can re-sell your account after you’ve made a few payments and you’ll need to negotiate a new settlement. Much better to pay a lump sum.
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