When paying bills can hurt your credit

"If you're making a payment (on a past-due account)," Quinn said, "that will not negatively affect your score, in and of itself."

You still can hurt your score, however, by "settling" an account for less than what you owe. Such settlements may get the creditor off your back, but the notation of "settled" on your credit report can sometimes be worse for your FICO score than just leaving the account open and unpaid, said Barry Paperno, a Fair Isaac manager.

"Settling the account can add a new element to its record at the bureau," Watts said. "Since that element's date would be more recent than the original item, it can end up lowering the score."

Now, this assumes you're still dealing with the original creditor. If you're dealing with a collection agency, a settlement can be more of a wild card: It could help your score, it could hurt your score or it may have no affect.

Lenders may require you to pay old debts

Of course, just leaving the account unpaid might not be an option if you want to buy a house. A mortgage lender may require that you pay off or settle any open collections that show up on your credit report as a condition of getting the loan.

If you're interested in a settlement, credit repair experts suggest that, as part of your negotiations, push to have the creditor or collection agency either stop reporting the account altogether or demand that the account be reported as "paid in full" rather than "settled." Such treatment might not help your score, but it's less likely to hurt it. You'll have more clout if you're able to pay a lump sum than if you have to set up a payment plan.

Credit bureaus really hate it when collection agencies agree to these demands and have even banned companies for failing to properly report transactions. But that doesn't mean you can't try.

How long credit bureaus can report your accounts

Your credit score is based on information in your credit report, and there are limits on how long your bad marks can be used against you. Once a negative item is on your file, it generally can be reported for 7½ years from the time you stopped paying on the account. (Bankruptcies can be reported for up to 10 years.)

So, if you stopped making payments on your Visa bill in January 2004, the lender can report a charge-off the following June. The account can be reported to the credit bureaus until June 2011, when it must be deleted from the bureaus' records.

How letting sleeping dogs lie can affect your credit

You can see why some borrowers choose to just let their old debts "fall off" their credit report rather than try to repay. Once the bad marks are gone, your credit score probably will improve, and you'll still have the money you would otherwise have sent to your old creditors.

Note the word "probably." In credit scoring, little is certain. Thanks to the way the FICO is designed, sometimes a score actually drops after old, bad accounts disappear.

That's because the FICO formula groups borrowers based on certain characteristics, such as whether they've had a bankruptcy or other credit problem. You could rise to the top of the "had-a-bankruptcy" group but, once your bankruptcy drops off your report, be "transferred" to another group, where you'd rank near the bottom.

"That move (from one group to the next) can sometimes be pretty graceless," Watts concedes. "It's as though you fell off a chair. Your score can change a couple dozen points for no apparent reason."

Fair Isaac attempted to ease this transition with its "next generation" credit-scoring model, known not surprisingly as NextGen. But most lenders still use the classic FICO scoring formula, so a sudden score drop when a negative item disappears is still a possibility.

Know your state's statute of limitations

That's not the end of the complications. Each state limits the amount of time in which a creditor can sue you after an account becomes delinquent. Sometimes the statute is longer than the credit reporting limits, sometimes shorter.

The statutes of limitations for written contracts, for example, range from three years in Delaware to 15 years in Ohio, although the typical limit in most states is five or six years. The rules vary widely, but, in some states you can inadvertently extend the statute of limitations by entering into a repayment plan with a creditor or even by acknowledging that a debt is yours. Getting dragged into court and having a judgment entered against you could further hurt your credit score and your efforts to rehabilitate your credit.

Before you contact your creditors, you should know the details of the statute of limitations in your state. (If you've moved, it may be the state you live in now whose law will apply, even if you entered into the credit agreement in another state.) Your best bet may be contacting a consumer law attorney for help; you can get referrals from the National Association of Consumer Advocates.

Several Internet sites, including CreditBoards.com, have message boards whose members share advice and tactics.

In the end, you may decide that trying to pay off your old accounts isn't worth the hassle -- or you may decide just the opposite. You may decide the ethical obligation to pay what you owe outweighs any short-term concerns you have about your credit.

"If you can afford to pay, pay," said Steve Rhode, chairman of the credit-crisis counseling firm MyVesta.org. "Too many people live and die by what their credit report says."

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

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