It is generally accepted that if you pay off your debts, your credit score will go up. This is believed because it makes sense logically. If you pay off a debt, you owe less and you are more able to handle your other obligations.

However, there are some instances where paying a debt actually hurts your credit score. Here’s why.

When you have a collection account or a judgment on your credit report, the impact it has on your score is directly related to the age of that account. Unfortunately, when there is any activity on those types of accounts, they are treated as if they are new accounts.

For example, if Joe has a collection account for $100 on a medical bill that his insurance didn’t pay and it first hit his credit in January 2010, it would now be two years old. It would not have a significant impact on his score as long as he had other current accounts since then.

But, if Joe decided to pay that account right now, it would reduce his credit score because the credit scoring program would treat it the same way it did when it was reported.

So the big question is, how do you get these accounts paid without killing your credit score?

The simplest way I have found is to make a deal with the creditor before you pay the debt. If they will agree in writing to remove the collection account upon receipt of payment, you could find a way to scrape together enough money to pay them. This handles the debt and helps your credit.

Judgments are a little different since they are a matter of public record and are much harder to remove from a credit report. Since it seems that these accounts rarely get updated to show they were paid, it is a simple matter of getting proof that the judgment was satisfied.

Keep this proof on hand for any time that you may need it (until the item has fallen off your credit report) and supply that information as needed. Don’t take the time to have your credit report corrected to show you have paid it unless you absolutely have to (which I have never seen).

Use these simple steps to help keep your credit scores higher and, if you need a mortgage while your scores recover, try a hard money lender (like us).