Are Paid Accounts Good on Your Credit Report?

The information in your credit report helps lenders evaluate your creditworthiness by preparing them for what to expect when doing business with you. A history of paid accounts demonstrates that you manage your debts responsibly and are likely to pay your debts on time -- making paid accounts a positive feature on your credit report.

Payment History

Lenders closely evaluate your history of payments to current and past creditors when you apply for new debt. Even if you have yet to pay off your accounts in full, the fact that you paid the debts on time in the past serves as a positive feature on your credit report and boosts your credit score. According to the Fair Isaac Corporation's MyFICO.com website, your payment history is responsible for 35 percent of your total credit score. Thus, timely payments are the most positive feature your credit file can reflect -- regardless of whether the account itself is still open.

Debt Level

Although a good credit rating helps you qualify for new debt, it is not the only feature that lenders look at when reviewing your credit history. A lender wants to ascertain that, should it approve your application, your income will allow you to make monthly payments comfortably. Thus, the more debt you carry, the harder it is to obtain new debt.

Accounts on your credit report that not only reflect a history of timely payments, but that have been paid in full and closed, boost your credit scores without being a debt liability. Paying off the debt frees up the amount that would have otherwise gone to your previous creditor -- making a new lender more likely to approve your application.

Positive Impact

While paid accounts have an immediate positive impact on your credit rating, derogatory entries lessen the positive effect paid debts have on your credit scores. A paid-off auto loan, for example, helps you less if your credit history also reflects a defaulted credit card account or past bankruptcy.

In addition, the impact paid and closed accounts have on your credit score decreases over time as the account ages. The FICO credit scoring formula places the greatest degree of importance on the most recent information. The credit bureaus typically remove all evidence of your closed accounts -- positive or negative -- after seven years.

Paying Bad Debts

While paying off current debts benefits your credit score, paying bad debts, such as credit card charge-offs or collection accounts, does not positively influence your score. Just because your credit score remains unaffected, however, that does not mean that paying your defaulted accounts does not affect your credit report as a whole. Once you pay off bad debts, your creditors must notify the credit bureaus of that fact, and the derogatory account updates as "paid" within your credit file. Paid accounts always look better to lenders than unpaid ones.

Settling your debts, however, is not the same as paying them in full. Settled accounts do not update as "paid" with the credit bureaus, and communicate to lenders that, because you negotiated for a lower balance in the past, you are more likely to do so in the future -- making you a higher risk for the lender.