Paying off bad debt

[susserman]

So hopefully by the end of next week I will be paying off all 3 of my charged off accounts after 2+ years. I will be clearing about 5k in debt. How will this affect my score/report. I have had some good lines of credit since them probably about 5-6 lines. I'm hoping my score will go up at least a little now that I can show all my charged off accounts as paid.

[jeffriesde]

Unless you negotiated a PFD you may not see an increase.  You could even see a decrease in score due to the updated DOLA.  It does look better for manual underwriting, but as for FICO scores a CO counts the same if it has a $10k balance or a $0 balance.

The exception to this is if they were CC's that were still being factored into your UTIL.  Again this could help or hurt your score, if they were being factored into UTIL then you will loose the Available Credit as well as the Balance.

As always YMMV.

[susserman]

I'm pretty new to this so I don't quite understand the accronyms. I figured that by closing the bad accounts and unloading some debt my credit score should go up.

[Anonymous]

Well, since your credit to debt ratio is going to change, your score may very well go down. You need to see how much credit you have available with regards to how much debt you have on each card.  Don't get me wrong--it's great that you're paying off such a huge amount of debt, but the tricky thing about using credit is you have to USE it and pay it off while still have some money on some of your credit cards.  Confused yet?  Basically, don't charge more than you can afford, but do charge in order to keep your credit score high. 

Your credit score may eventually go up when you begin to use your credit lines more wisely, but it will take time.  Remember, the only BAD DEBT is debt that you can't afford to take on.  If you have the funds to pay off what you charged that month, then you're doing great and using credit wisely and responsibly.

Oh, don't forget to protect your credit history by pulling your credit reports every year from each of the 3 credit bureaus and don't overlook the benefits of investing in a credit monitoring service.  The bureaus have their chosen monitoring service companies, but there are independent ones like Identity Guard that are also top-tier as well.  Hope this helps a little.

[RobertEG]

On the plus side, while paying a debt does not remove the reported delinquencies and derogs under the account, and thus does not remove their adverse scoring effects, it's not all just about today or a three-digit number.

Charged-off accounts are very likely to be sold, and if so, the new owner becomes a debt collector, and can report a collection to your credit report.

Paying before that happens can avoid future damage.

Additionally, particularly with respect to a charge-off, there is a big manual review issue.  A charge-off is a creditor statement that your debt has reached the point in time wherein they consider the debt to have be uncollectible....i.e., the consumer is not going to pay.  That's a harsh comment upon a manual review of your file.

By paying, you offset that prior creditor perception, and show others that you do pay obligated debt.

[Shogun]

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@RobertEG wrote:

On the plus side, while paying a debt does not remove the reported delinquencies and derogs under the account, and thus does not remove their adverse scoring effects, it's not all just about today or a three-digit number.

Charged-off accounts are very likely to be sold, and if so, the new owner becomes a debt collector, and can report a collection to your credit report.

Paying before that happens can avoid future damage.

Additionally, particularly with respect to a charge-off, there is a big manual review issue.  A charge-off is a creditor statement that your debt has reached the point in time wherein they consider the debt to have be uncollectible....i.e., the consumer is not going to pay.  That's a harsh comment upon a manual review of your file.

By paying, you offset that prior creditor perception, and show others that you do pay obligated debt.

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+1  Now that the debt is gone, there's not chance of it popping up at the most inopportune time.  Now any repair of growth of your credit will be unhindered.  Start the GW process of those accounts.  Good Luck!