In the United States, lenders and service providers report past due debts to the three major credit bureaus: Equifax, Experian and TransUnion. Unsurprisingly, derogatory accounts hurt your credit score. You can undo some of the damage by contacting your creditors and paying off your delinquent bills. However, there are no quick fixes when it comes to repairing your credit score.
Credit bureaus calculate your credit score by examining various bits of information related to your financial activities. Your payment history is the biggest single factor in these calculations and counts for about one-third of your overall credit score. Payment history includes on-time payments as well as details of payments that are 30, 60, 90 or 120 days past due. Derogatory accounts are severely past-due accounts that are no longer active and have been passed over to collection agents. Details of derogatory accounts and missed payments remain on your credit report for seven years.
Paying in Full
Lenders often sell derogatory accounts to debt collection firms that specialize in collecting past-due debts. As a result, such accounts may show up on your credit report as being owed to the collection firm rather than your actual lender. You can pay off a past-due account at any time by contacting the firm that owns the debt. Once you've paid, your credit report is updated to show that the account has been paid in full. However, a record of the account remains on your report for up to seven years. The fact that you paid it may boost your score, but it won't erase the derogatory account from your credit history.
Debt collection firms often buy delinquent accounts from banks for cents on the dollar. Banks are content to get at least something in return for the outstanding debt, while collection firms make money if they manage to collect on even a fraction of the accounts they acquire. You may receive an offer of a debt settlement that involves agreeing to settle the debt by paying less than the balance owed. These agreements don't help your credit score because you're not actually paying off the debt.
Credit Score Formula
About 30 percent of your credit score is based on the balances you keep on your accounts. Credit bureaus assume you're having financial problems if you keep your credit cards maxed out at all times. On the other hand, low balances are good because you're proving that you can live within your means. When you manage your other accounts wisely, you help to raise your credit score. You may not be able to entirely offset the damage done by derogatory accounts, but you're taking a step in the right direction.