Does Paying off a Charged-off Account Affect Your Credit Score?

Charged-off accounts are harmful to credit scores. A charge off is a negative entry on a credit report because it shows the debtor failed to pay an account they had agreed to pay. After several months of trying to collect the debt, credit card companies and other creditors close delinquent accounts and list them with credit bureaus as charge offs. Paying a charged-off account does not remove the information from your credit reports --- and it may not affect the debtor's credit score.

Considerations

Charge-offs are a red flag to creditors who fear the debtor could walk away from other obligations as well. That makes it difficult for some debtors to gain credit at reasonable interest rates when recent charged-off accounts appear on their credit reports. Damage to credit scores from charge offs mostly occurs in the months leading up to the charge off. Creditors report each missed payment to major credit bureaus such as TransUnion, Experian and Equifax. A charge off usually occurs when the account holder falls behind on payments by four to six months. Missing that many payments in a row usually causes credit scores to fall if the debtor had good credit before the problems began.

Patience

The debtor's credit score could take another hit after the charge off. Paying the charge off does not immediately reverse all the damage, however. Bankrate reports that credit scores usually do not change after a debtor pays a charged-off account. That is because charge offs remain on credit reports for seven years. Paying a charge off results in the account being updated to show it as a "paid charge off." Although that may not help credit scores, it does show the debtor eventually made good on the debt and thus helps the debtor's overall credit.

Pay for Deletion

There is one way to remove charge offs from credit reports. Some creditors will agree to an arrangement called "pay for deletion." Under that scenario, the creditor agrees to delete charge offs from the credit reports if the debtor makes the payment in full. It is a legal process, but many creditors will not offer the arrangement. Removing any negative information from credit reports helps credit scores, but it is impossible for anyone to accurately predict how credit scores might improve when a charge off is removed.

Strategy

Debtors with charge offs on their credit reports should first check the report to find the date of the last activity on the account. Charge offs automatically expire from credit reports seven years after the date of last activity, such as a payment. A debtor with a charge off about to expire can choose to wait for it to roll off his credit reports. Paying the charge off is the next option. Allowing the charge off to simply expire and disappear from credit reports is usually the best option when trying to improve credit scores. Removing negative credit information helps credit scores. Paying the charge off could lead to a "paid charge off" remaining on credit reports and causing a further drag on credit scores.