debt

Bad credit can linger after you repay debt

Steve BucciDear Debt Adviser,
I am 30 years old and have recently moved back home with my mother in an effort to save money and repay old debt. The ultimate goal is to become debt-free and begin saving for a home. I have recently gathered all of those collection notices I've received in the mail and also obtained copies of my credit reports in an effort to begin paying off old debt. I have set up payment plans with a few companies, and things seem to be looking bright. The other day, I began to wonder how paying off the charged-off and collection accounts would actually affect my credit score.

I did some research online and have found that even if I pay off these accounts, they will remain on my credit for seven years. I was in shock. The whole point of paying off these accounts is to have the debt removed from my credit report. Is it really true that the debtors will not remove these items if I pay them in full? If so, is it really worth it for me to pay off these debts? Am I better off just leaving the debt alone? Thanks in advance for your help.
-- Stacey

Dear Stacey,
So, how much do you enjoy living with your mother? Well, I am being serious with that question. If your ultimate goal is to lead a productive and successful life, which may include moving out on your own, you will need to pay your old debt. Let me explain why.

Many people don't understand that it's not a great credit score that leads to a successful (financial) life. It's living a successful (financial) life that leads to a great credit score! A credit score merely translates what it sees on your credit report into a three-digit number. But what you do with your life is reflected in your credit report.

You obviously had some credit problems in your past. These pop up on your credit report as negative accounts and charge-offs. Your credit report functions as a predictor for those considering doing business with you. Although we have no way to completely predict the future, past performance usually gives a good indication of future performance. So both your negative payment history (mostly removed after seven years) and positive payment history show on your credit report, allowing people who don't know you to make an educated judgment about the wisdom of doing business with you. And yes, it is true that a creditor cannot remove accurate negative information from your credit report, even when the debt is paid off.

To accurately determine the risk of doing business with you, people need to see your credit history, warts and all. Without credit reports to help determine risk, we all would be paying much more. The good news is any negative items on your credit report will count for less as soon as you pay them off, and they'll have even less impact in the months and years to come. But most importantly, you'll have learned how to pay your bills as agreed. Keeping an unpaid debt around until it falls off your credit report on its own won't do that!

As for a mortgage, you will generally find it very difficult to qualify for a home loan if you have unpaid charged-off or collection accounts on your credit report. You may find it possible to qualify if you have accounts that have not been paid in full but have payment arrangements in place, and if you have a track record of making payments on time and as agreed for at least six months.

To get you out of your mom's place and into a life of your own, I suggest you concentrate on paying off that old debt, start saving for a down payment as well as for emergencies, and add positive information to your credit report. Positive information includes on-time and as-agreed payments on all current accounts. If you don't have any open credit accounts that are in good standing, you might consider opening a secured credit card account and/or a passbook savings account at your local bank or credit union.

Good luck!

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