Creditors typically make monthly reports to the credit bureaus. In instances where you have paid off a delinquent debt, the debt should show as having been paid within about 30 days of the pay-off date. However, in some instances creditors fail to notify credit bureaus about paid-off debts, and even if the debt shows as having been paid, you may not see a big rise in your credit score.
Under federal law, the three major credit bureaus -- Equifax, Experian and TransUnion -- have to provide you with a free annual credit report through the website annualcreditreport.com. This law exists so that you have the opportunity to review you credit report and notify the bureaus of any errors. When you default on a debt, your creditor may sell the debt to a collection firm. That firm then reports the debt to the credit bureau and this could cause the debt to appear twice, once with the original creditor and once with the collection firm. When you pay it off, the collection agency version of the debt may show as settled but the original debt may still show as unpaid. Resolve this by sending copies of your payoff receipt, details of the original loan number and a letter of explanation to each credit bureau. Bureaus normally rectify issues within 30 to 45 days.
When you default on a debt, it causes your credit score to drop, but the debt also shows up on your credit report in a number of ways. Firstly, it shows up as a 30-day late pay. Credit bureaus also record it as being late at the 60-, 90- and 120-day marks. If the creditor writes off the debt as a loss, it shows up as a "charge off," and it also shows up as a debt that you currently owe. When you pay it off, it appears on your report as "paid" rather than delinquent, but a record of the charge-off and the late payments remain on your credit report for seven years.
A number of factors affect your credit score, including your balances as a percentage to your available credit and your monthly payment history. The credit bureaus rely more heavily on recent credit activity rather than past events. Therefore, if you pay off a years-old delinquent debt, it may have little positive impact on your credit score because your most recent credit activity has a much greater impact on your credit score.
It can take months to pay off a delinquent debt and ensure that it shows as paid on your credit report. Furthermore, you may see little or no change in your actual score once you settle the debt. However, while debt settlement does not always drastically improve your credit score, it can make it easier for you to get a bank account or to sign up for any kind of contract service. Many banks and service providers refuse to offer you new accounts until you have settled your delinquent debts. A bank can even refuse to open a checking account in your name until you have settled your past-due debts. Therefore, your payment history as well as your actual credit score can have a major impact on your life.