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Paid charge-offs, score dropping!

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Paid charge-offs, score dropping!

Yikes, just wanted to drop this in here because I hadn’t seen it elsewhere when I was looking for info.

I had a few credit cards that were charged off about 1-2 years ago amidst some financial problems. Obviously my scores weren’t in great shape from this (~602 ea.), and their balances (~$3500) were still counting towards my revolving utilization. (Making it 100% even though I’m using only 3% of my open accounts.)

Just over a week ago I made the decision to pay all of them off—in full—to try to rebuild my report and score and get my utilization down. (It’s at 3% on open accounts, doing an AZEO with 10% on one card and 0% on 2 others.)

So today the first one—Capital Bank (not Capital One)—triggered an update to my Experian credit report. MyFICO kindly gave me a score alert. “A collection listed on your credit report has been updated.” The status was changed to “Paid Charge Off.”

According to my credit 3B report pulled in January I had no collection accounts, just a bunch of charged off revolving accounts. My Experian score dropped 20 points, and there are still more “paid charge off” accounts incoming. It’s another week until I get February’s report, but I’m going to be really upset if I see the Collection Accounts go from empty to full of paid collections.

I read a slew of articles about how paying charge offs improves your credit, and not a single one saying that if I did so it would tank my score. The closest I saw was that settling the debt would count as a negative mark, so I made sure to pay each one in full.

Any bright side to this while I wait for the other “paid charge off” updates to show up and tank my score further? Or, more importantly, any advice on reversing the score drop?
-Jul 19 2019-

Message 1 of 7
6 REPLIES 6
Legendary Contributor

Re: Paid charge-offs, score dropping!

After you pay a delinquent debt, the creditor (or debt collector) is required to promptly update their reporting to show a new current, non-delinqency status of paid, $0 balance.  FCRA 623(a)(2).

 

That is the first reporting of a change in the status from being delinquent to a non-delinquency status.

It thus effectively updates the overall period of account delinquency that has expired since the date of initial delinquency, and thus similar to updating from, for example, 60-late to 90-late, effectively updates the total period of delinquency, which has score impact.

 

The good news is that after that initial update, and futher updates on their part will not extend the period of delinquency, as the first updated reporting changes the status to a non-delinquency status, and thus freezes the period of overall delinquency.

 

If it has been a substantial period since the credtior last updated their current status of CO, then their final update upon payment of the debt can have significant scoring impact.  However, if they have been making regular monthly updates showing continued delinquency status, then the final update will not have significant scoring impact.

 

Similar scoring impacts apply to paying collections.

Message 2 of 7
New Contributor

Re: Paid charge-offs, score dropping!

So basically the short of it is your score most likely tanked because the Original Creditor had not updated the payment history to reflect all of the late payments. Payment history makes up 35% of your credit score, the more recent, frequent, and more serious the delinquentcy classification (30, 60,90-120+days) the harder they hurt. Since you PiF, they have to update it, so all those lates now reflecting are hurting you.

Now here is the good news.

1.) Eventually wether it was the OC or a CA, it would have been updated anyway and it still would have hurt you, but now, since it's paid, as time goes on it will hurt less.

2.) If you ligitimately owed the money, you did the right thing by paying it. I honestly believe that without an attitude of commitment to pay what you owe, one is not likely to succeed in credit building.

3.) Being paid it will look better than unpaid to second chance lenders, and as the delinquentcies age off the negative payment history affect will lessen and your utilization won't be trashed.

4.) Other creditors may have updated your charge offs more recently and thus they may not hurt as badly.

Generally speaking, the sooner you take action the better for your credit. If your late, don't be 30 days late, if your 30 or 60 days late, don't be 90 or 120. If your 120, don't be 180 etc... This is my opinion and it is assuming the debt is ligitimate. If it's not, I think in most cases payment with no recourse is not a good option. But I am no expert on credit repair.

























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Message 3 of 7
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Member

Re: Paid charge-offs, score dropping!

I'm in a similiar situation, where I'm trying to boost my score in the short term, with goal of overall better financial health. Is there a way to know in advance if paying charge offs will do this to your score? If it will, I may wait to pay off and just try to get my utilization down since i can't take the hit in the next 2-3 months.

Message 4 of 7
Established Contributor

Re: Paid charge-offs, score dropping!


@jmb37 wrote:

I'm in a similiar situation, where I'm trying to boost my score in the short term, with goal of overall better financial health. Is there a way to know in advance if paying charge offs will do this to your score? If it will, I may wait to pay off and just try to get my utilization down since i can't take the hit in the next 2-3 months.


When was the last time it was updated? If it's updated every month already, then paying it off should not cause a drop. If it hasn't updated for a while, then it will likely cause a drop. 

 

If it is updating each month then its already hitting you fresh every time it updates. So, getting that paid so it stops reporting will start to help your scores start to improve sooner. 

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Message 5 of 7
Member

Re: Paid charge-offs, score dropping!


@dynamicvb wrote:

@jmb37 wrote:

I'm in a similiar situation, where I'm trying to boost my score in the short term, with goal of overall better financial health. Is there a way to know in advance if paying charge offs will do this to your score? If it will, I may wait to pay off and just try to get my utilization down since i can't take the hit in the next 2-3 months.


When was the last time it was updated? If it's updated every month already, then paying it off should not cause a drop. If it hasn't updated for a while, then it will likely cause a drop. 

 

If it is updating each month then its already hitting you fresh every time it updates. So, getting that paid so it stops reporting will start to help your scores start to improve sooner. 


Sorry for the naive question, but updating every month means it shows as a charge off every month since deliquent on my report, right?

Message 6 of 7
Senior Contributor

Re: Paid charge-offs, score dropping!

Yes, it means every month the creditor tells the bureaus “jmb37 still hasn’t paid this account” and the effect of the negative hits again, suppressing your score. Once paid and updated, no further updates can happen. This allows the negatives to age and fade back into the distance over time, and their effects on your score begin to fade.


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