Deciding whether to pay off old debt or let it fall off your credit report is a common financial dilemma. On the one hand, paying off old debt can improve your credit score. On the other hand, if the debt is about to fall off your report anyway, you may want to save your money rather than pay it. There are pros and cons to each approach, so let’s take a deeper look.
What happens when debt falls off your credit report?
Debts generally fall off your credit report after 7 years from the date of your first missed payment that led to the account becoming delinquent. This is because the Fair Credit Reporting Act limits how long negative information can stay on your credit report. Specifically:
- Most negative information will stay on your report for 7 years.
- Bankruptcy records can remain for up to 10 years.
- Unpaid tax liens can remain indefinitely until paid.
After the time period ends, your credit report will no longer show the unpaid debt. Since the debt is no longer on your report, it can’t directly hurt your credit score anymore. Your score may improve as a result.
How credit scoring models treat paid vs. unpaid debt
To understand whether it’s better to pay or not pay old debt, you need to know how credit scoring models like FICO treat each scenario. In general:
- Unpaid debt hurts your score until it falls off your report.
- Paying the debt has an immediate positive impact on your score.
Specifically, FICO shows that:
| Factor | Impact of Unpaid Debt | Impact of Paid Debt |
|---|---|---|
| Payment history | Hurts score | Helps score |
| Amounts owed | Hurts score | Helps score |
| Credit mix | No impact | Helps score |
As you can see, paying off old debt has a positive effect across multiple scoring factors. The only reason unpaid debt isn’t hurting your score anymore is that it’s no longer on your report at all.
The pros of paying old debt before it falls off
Given how credit scoring works, here are some potential pros of paying off old debt instead of waiting for it to disappear:
1. It may improve your credit score
As the FICO factors above show, paying off old debt can improve your credit score, even if the debt is very old. Each of the three major credit scoring factors – payment history, amounts owed, and credit mix – are positively impacted when you repay debt. Even though the debt is technically still helping your score while unpaid as well (by hurting your score less and less over time), there’s an immediate score bump once it’s paid.
2. It makes you eligible for better loan terms
A higher credit score means better loan terms. Depending on how much your score increases after paying old debt, you may cross thresholds for lower interest rates or qualify for more credit products. Even an extra 20 or 30 points can make a difference. Paying off debt before it falls off your credit report maximizes how much of a boost your score gets.
3. You may re-establish a relationship with the lender
If the old debt is from a lender you may want to get credit from again, paying it off can re-establish a positive relationship. The lender will see the debt was ultimately paid, which looks better for future loan applications than waiting until it disappears altogether.
4. It feels emotionally satisfying
For some borrowers, paying back old debt feels morally correct or emotionally satisfying. It can provide a sense of closure. The debt was accrued, and now it can finally be repaid. If you have felt guilty about not paying the debt, repaying it may relieve that stress.
The pros of letting old debt fall off your report
On the other hand, here are some potential pros of letting old debt fall off instead of proactively paying it:
1. The credit score impact will disappear either way
If old debt is close to falling off your credit report, the negative credit score impact has likely already disappeared. For debt that is more than 3 to 4 years old, paying or not paying it may result in little or no credit score improvement either way. The score impact fades over time.
2. You save your money
Not paying old debt means keeping the money in your wallet. Depending on the amount of the debt, paying could impact your budget and financial situation. Keeping the cash may be more important, especially if you incurred the debt during a hardship like job loss or illness.
3. The creditor may not be able to collect
In many states, debt that is older than 3 to 6 years is past the statute of limitations, meaning creditors are prohibited from suing to collect. It’s also often past the time period that allows creditors to seek wage garnishment. Letting old debt fall off your credit report takes away the creditor’s power.
4. You avoid “re-aging” your credit report
In some cases, paying or agreeing to pay an old debt can “re-age” it on your credit report. This means the creditor is allowed to extend the 7-year reporting period from the date of your new payment, rather than the first delinquency. Avoiding this re-aging is another reason to let old debt fall off.
Key factors to consider
When deciding whether to pay or not pay old debt, keep these important considerations in mind:
How old is the debt?
The older the debt is, the less paying it will boost your credit score. If it’s less than 2 to 3 years old, paying could result in a meaningful score bump. If it’s 6 to 7 years old, your score likely won’t change much either way.
What type of debt is it?
Your strategy may differ based on the type of debt. For example:
- Medical debt – This can often be negotiated and may not need to be paid in full.
- Debt owed to family/friends – You may get a pass on repayment, but discuss this delicately.
- Debt related to a repossessed asset – You could still be on the hook for the deficiency balance after the repo sale.
Is the creditor still attempting to collect?
Collectors are required to remove you from their contact list if you send a written cease-and-desist letter. If the creditor is still bugging you to pay, sending this letter may provide peace of mind. Paying old debt only to continue getting contacted by collectors causes frustration for many borrowers.
Can you settle for less than the full amount?
It’s common for collectors to accept smaller payoff amounts as payment in full on old debt. This is because they often purchase the debt for pennies on the dollar. If you can settle an old debt for a fraction of what you originally owed, paying may be worth it. Just get any settlement offer in writing first before sending payment.
Will the creditor re-age your credit report?
Ask the creditor directly if paying or settling the debt will restart the 7-year reporting period. If so, the debt could stick around longer if you pay. Avoid re-aging whenever possible.
Conclusion
Should you pay or not pay old debt? There is no one-size-fits-all answer. It depends on your specific situation.
Paying old debt before it falls off your credit report can positively impact your credit score, get you better loan terms, and provide peace of mind. However, it also costs you money you could save, and may not boost your scores much or lead to unwanted consequences like re-aging.
Generally, paying more recent debt under 3 to 4 years old is worthwhile if you can afford to. For older debt near the 7-year mark, not paying often makes more financial sense.
Carefully consider the above factors and consult credit experts when available. An early financial planning session can provide guidance you need to determine if paying or not paying each old account will get you closer to your money goals.