What Happens When You Pay Off a Delinquent Debt?
A delinquent debt is considered one of the worst things that can happen to your credit score because it indicates a serious payment issue. This type of negative credit record results from not making payments on the debt for a period typically ranging from 120 to 180 days.
After this period of late payments, the creditor considers your account a loss and records it as uncollectible from an accounting perspective. Your account will be closed to any new payments, however, you still owe the balance. The creditor will continue to attempt to collect the outstanding balance and may even hire an outside debt collector.
What Happens When You Pay Off a Delinquent Debt?
If you pay off a delinquent debt, you might expect your credit score to rise immediately as you’ve settled the outstanding balance. Unfortunately, it’s not that simple.
Paying off a delinquent debt does not remove the account from your credit report. This is because settling the outstanding balance does not erase the fact that your account was delinquent. Paying off the delinquent debt also will not improve your credit score – at least not immediately.
Over time, your credit score may improve after paying off the delinquent debt if you continue to make timely payments on all your other accounts and manage your debts responsibly. However, if you are delinquent again or have another account in delinquency (or something worse like eviction or repossession), your credit score may drop further, and it could take longer to recover.
The delinquent debt will eventually be removed from your credit report whether you paid it off or not. The time allowed for reporting delinquent debts expires after seven years and 180 days from the date of the first delinquency that resulted in the account being settled.
Note: If the delinquent debt is still listed on your credit report after the reporting time limit has passed, you can dispute it with the credit bureaus for removal.
Benefits of Paying Off a Delinquent Debt
Most people may only pay off a delinquent debt if it means an increase in their credit score. You might be less inclined to pay off your delinquent debt since you likely won’t see an immediate increase in your credit score. However, there are other good reasons to pay off your delinquent debt.
First, paying off a delinquent debt looks better when applying for credit. Lenders and creditors and other companies are likely to weigh down your chances of approval as long as you have outstanding balances on your credit report. It sends a message that you may not pay any new accounts either. Once you pay off the delinquent debt, your chances of getting your applications approved increase.
Paying off the outstanding balance also reduces your overall debt, which can help boost your credit score, as 30% of your score is based on how much debt you carry.
Negotiating to Delete the Debt
You might be able to remove the delinquent debt by negotiating for it to be deleted with the creditor or debt collector. Debt deletion involves offering to pay the account in full in exchange for it being removed from your credit report.
You can explain to your creditor the circumstances that led to your delinquency and request the deletion of the debt. If you can negotiate for the deletion of the debt (it can be difficult), you are likely to see an increase in your credit score after the item is removed from your credit report.
Note: Creditors are not obligated to remove accurately reported accounts from your credit report, even if you pay them off in full.
How to
Avoid Late Debt
Knowing when debt becomes late puts you in a better position to avoid such serious delays. With each missed payment, it becomes harder to catch up on late payments as fees and interest accrue on the outstanding balance. If you fall behind on payments, make an effort to catch up on any late payments as soon as possible.
If you foresee problems in making your credit card payment, contact your credit card issuer early instead. You may be able to arrange a settlement payment that allows you to avoid late debt. Or if you’re having financial issues, your credit card issuer may allow you to join a hardship payment plan with reduced monthly payments.
Frequently Asked Questions (FAQs)
Can I settle my late debt, or is it better to pay it off completely?
It’s always best to pay off the debt in full, and this also applies to late debts. In your credit report, the late debt will be marked as “Settled” instead of “Paid in Full,” sending a different message to potential lenders.
Is late debt worse than debt that goes to collections?
Once your unpaid late debt goes to collections, the incident will show up on your credit report twice, further affecting your score. Talking with the creditor and settling the late debt can stop it from going to collections, preventing both from impacting your score. Often, lenders will be more forgiving if they see that these payments were made in full.
Was this page helpful?
Thank you for your feedback! Let us know why! More
Sources:
– Equifax. “What Is a Charge-Off?”
– Experian. “What Does ‘Charge-Off’ Mean on a Credit Report?”
– Experian. “Can a Paid Charged Off Account Be Removed From the Report?”
– Federal Trade Commission Consumer Information. “Fair Credit Reporting Act § 605. Requirements Relating to Information Contained in Consumer Reports,” Page 22.
– Federal Trade Commission Consumer Information. “Disputing Errors on Credit Reports.”
– MyFico. “What Is Amounts Owed?”
– Lexington Law. “Pay for Delete Letter Template for Credit Repair.”
– Consumer Financial Protection Bureau. “Is It Possible to Remove Accurate, Negative Information From My Credit Report?”
– Experian. “Is It Better To Pay Off Debt or Settle It?”
– Experian. “What Is a Charge-Off?”
Source: https://www.thebalancemoney.com/will-paying-a-charge-off-improve-your-credit-score-960556
Leave a Reply