It may seem pedantic, but I think it's an important distinction to point out that FICO isn't penalizing you for having all zero balances, they're REWARDING points for using the credit.
People tend to think of everyone "deserving" 850 points and then having them deducted for various things, but that's not how it works. You start with a low number of points and then earn points through various credit-related behaviors. One of those behaviors is demonstrating use of credit by showing a small balance on a card, which EARNS you points.
To say that you're penalized for having a zero balance is like saying you deserve money for a job you didn't do. If you don't do what the FICO formula needs you to do to earn those points, you simply didn't earn the points.
It's an entirely different subject whether or not you think it's a good formula, but the fact remains that there's no penalty for having zero balances, there is, rather a reward, for having a small balance on one card.
That's right. You get rewarded for using credit (having at least one non-zero balance), but penalized if you're using too much credit (have too many non-zero balances). The ideal balance, as far as scoring is concerned, seems to be AZEO, but it's worth noting that your scores will still be very good even if all your accounts have a low non-zero balance. AZEO is mostly a trick used by people right before they apply for new credit, to squeak a couple extra points into their score, but it certainly isn't a magic wand that will add 30 points or anything, we're talking more like 2-5 points (versus having low balances on all accounts)
First an unpaid CO definitely counts towards utilization and it counts as a maxed out card because credit limit is typically reduced to $0. Plus you have the penalty for the chargeoff on top of the utilization penalty.
@Seventh_Summit Next I completely agree that it's not a penalty, it's an award. I just wrote that a few days ago in a post.
@kale161 Yes you will have good scores if you have low balances, for two reasons. First you're getting points for low utilization. Second you're getting points for the low raw dollar amount metric. Plus, third, if you do AZEO, you get points for having only one revolver report a balance. So when we refer to AZEO, you're actually optimizing three metrics, if you do what is recommended as AZEO.
Now as to number of accounts with a balance, on Experian it doesn't seem to make a big difference on score 8, but it does make a bit of a difference on the other two bureaus. It also makes a big difference on the mortgage scores.
Last if it ages off in September, you need to just let it age off. Even if you did pay or settle it, there most likely not gonna delete it, so it's not gonna do you any good and may do you harm by being updated.
Then when it ages off, your score would go back up and you would've paid all that just to decrease your score for a couple of months when it was about to jump up anyway.
There will be no score difference in September based on whether you were to pay it off and then let it age off or let it age off on its own. Either way it's going to disappear and your score is going to rebound to the same point, whether it was paid off or not, because it's going to be gone.