How Much of an Impact Does a Paid-in-Full Negative Account Have on Your Credit Score?

Your past credit history as shown on your credit report has a direct impact on your credit score and lenders use this score to assess your creditworthiness. The credit agencies Equifax, Experian and TransUnion all use credit scoring systems based on models developed by the Fair Isaac Corporation. Credit agencies do not deduct a set number of points when you fall behind on your debt payments and neither do the agencies reward you by adding a set number of points to your score when you settle the debt. Consequently, a paid-off negative account affects some people's scores more than others.

Deductions

Credit rating agencies can deduct points from your credit score for a number of reasons. You do not lose points for falling behind on your debt payments until you have missed your payment date by more than 30 days. Thereafter, the credit agencies dock your score again once you become 60, 90 and 120 days late on your payment. Lenders usually report debts as assets because the interest payments generate profits for the lender. Lenders reclassify seriously delinquent debts as nonperforming assets and these debts are charged off or written off, which means the lender no longer counts these debts as assets. When a lender charges off a debt, your credit score drops again.

Scores

Credit scores range from 300 to 850 and the better your credit history, the higher your score. Credit bureaus recalculate your credit score every time a lender or other party makes a credit inquiry. At that time the bureaus award you points for positive activity such as timely payments and deduct points for late payments and charge-off debts. Major negative events such as charge-offs have more of an impact on your score than minor positive events such as paying your bills on time. Since credit scores cannot fall below 300 or exceed 850, an individual account has less of an impact on your score if you have a multitude of accounts. If you have just one credit account then falling behind on that debt has a huge impact on your score.

Paying Debts

When you pay off a seriously delinquent debt, the creditor or collection agency that owns that debt has to report the debt as having been paid. Credit agencies view the settling of an old debt as a positive step in the right direction and in conjunction with other positive credit activity, this action could cause your credit core to rise. However, credit agencies do not expunge bad debts from your credit report just because you finally decide to settle the account. The record of your late payments and and a record of the charge-off remain on your credit report for seven years.

Considerations

Lenders rather than credit agencies provide you with credit. A lender can extend credit to you regardless of your credit score. However, rather than just checking your actual score, lenders usually review your entire credit report. If you have delinquent debts, then prospective lenders have to contend with the fact that your other creditors' debt collection efforts could impact your ability to pay any new debts that you take on. Clearly, you pose less risk to a lender if you have settled all of your past-due debts than you do if you attempt to take on new debt while you have collection agencies chasing you for old debts. Therefore, paying off a debt can help your chances of getting new credit even if paying the debt does not have a huge impact on your actual credit score.