Congress Needs to Reexamine Handling of Old Debts and Credit Scores
One would think that your credit score would be helped by paying off old debts. After all, if you were penalized for failing to pay the debt, then paying the debt in full - even if your payment was not on time - should boost your credit score. Sounds logical, but alas, it does not appear to be true.
A recovering debtor recently asked a L.A. Times columnist how long it would take for their efforts to pay off their past due debts to improve their credit score. I’m sure the answer shocked the reader - “Paying off old debts doesn’t do much, if anything, to improve your credit scores.” While there is some nuance to the answer, that’s pretty much the conclusion of the author.
I was disappointed, but not surprised, to see that conclusion. There are other articles and anecdotal reports that suggest that paying old debts can actually lower your credit score. That’s right - LOWER - as in reduce, decrease, harm, or hurt your credit score. Whether this is actually true or not is unknown - since the methods behind the calculation of your credit score are hidden in the proprietary formulas of our nation’s credit agencies.
Congress needs to reexamine credit scores and the problem of old debts when President-elect Barack Obama and the Democratic Congress consider how to reform the practices of the credit card industry and the nation’s bankruptcy laws in the coming months and years. If credit card debt is the next problem in the financial crisis, then consumers need more insight into their options when they are caught in the no man’s land between paying their bills in full and bankruptcy protection.
As financial institutions raise credit standards on individuals, and more of the nation is thrust into the grey area below perfect credit (or, even, acceptable credit) because of the tougher credit conditions, zero tolerance on late payments, increased credit reporting / monitoring, higher debt burdens, and the greater number of consumer transactions than the past, there needs to be new methods of debt resolution for the many Americans who will be stuck dealing with their unpaid debts and the resulting uncertainties for the next seven to ten years because they did not declare bankruptcy.
