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Paying Off Debt Didn't Help My Credit Score

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shalimarcat
Regular Contributor

Paying Off Debt Didn't Help My Credit Score

  Hello everyone. Last month my lawyer negotiated two great settlements for me. They were paid in late July and just reported to the credit bureaus and had no positive impact on my scores whatsoever. I am really surprised by that. Is this normal? ( I should add that the company, Amex, put a comment on the accounts that they were settled for less than full.)  While I am committed to paying off my debt no matter what, I am surprised that it didn't raise my scores.

Message 1 of 11
10 REPLIES 10
FireMedic1
Community Leader
Mega Contributor

Re: Paying Off Debt Didn't Help My Credit Score

If they were charge offs and paid. Depending on what your overall util % is. You may not see a score change. Its still a CO which ranks right under a BK but doesnt last as long. It will fall off 7yrs yrs from the DoFD.


Message 2 of 11
Anonymous
Not applicable

Re: Paying Off Debt Didn't Help My Credit Score

Just because the past due debt was settled doesn't mean that all of past delinquent history of the account is disregarded. You will still have a scoring penalty because of the charge off status of the account. 

Paying the settlement did start the aging process of the account though as it will no longer report as a current CO every month. As the debt ages, it will have a lessening negative effect on your credit score. 

Message 3 of 11
HowDoesThisAllWork
Frequent Contributor

Re: Paying Off Debt Didn't Help My Credit Score

Good morning, @shalimarcat !

 

So, this is a common misconception (and I speak from personal experience here).  I, too, am VERY new to this game called credit.  There are lots of things that just dont make sense!  Well, to us humans.  But they make perfect sense to the algorithms that the CRAs use to build your FICO Credit Score (gonna leave the VantageScore stuff out of this conversation....as the forum is - after all - the 'MyFICO' forum!  HA! HA!  But be advised that there is another 'credit scoring model' out there.....and it is called VantageScore - very likely you will see version 3.0 but you could also see version 4.0).

 

Here is - as an example - another situation where my credit score dropped nicely (but it was expected....as I investigated this topic in these forums...).   In February the ex-wife and I finally discussed and handled the marital home.  It was the one thing that we did not finalize in the divorce some 10 years ago.  So, the short version there is that she re-financed under her own merrit and the existing Mortgage and Deed went from "us" to "her".  In other words, the Mortgage that we both had was closed, and she opened up one on her own merrit.  So, that mortgage loan (aka, installment loan) went from open/active to closed for both of us.  Now I no longer have that as an open account on my credit reports.

 

Some 10 weeks later (at the end of April) I paid off my Auto Loan (five months early....go me!  The power of YNAB is awesome and amazing, people!!!!).  So now I have no more open and active "installment loans".  That speaks to "Credit Mix".  My credit score dropped some 25+ points on all three CRAs.  Again, I expected that as I researched this topic in these forums....but had I *NOT* done that I would have been a tad bit surprised.

 

Point there to that ramble.....lots of "common sense" things (again, to us humans) don't quite work out in the algorithms like we think "they should"! :-)

 

Now, to your post.....sorry, I like to talk/type!

 

I am going to ass/u/me that your attourney negotiated a settlement (by which you paid only a partial amount of a debt owed) for these two accounts that the creditor(s) "charged off"?

 

The term "Charge Off" is often confusing for people.  In good ole plain English, the term "Charge Off" is simply an accounting term that the creditors/lendors are able to use to tell the world "Hey, this dude has not made any payments for 180 days and we fear that we are not going to be able to collect this debt so we are going to move this account from our assets page over to our liabilities page and, effectively, we are done with this account".  Now, it DOES NOT mean that you do not owe the original debt (you still legally do indeed).  It just means that the original creditor has given up on their chances of collecting any money.

 

So, typically at the 180-day mark (aka, six consequtive months of missed payments....) the original creditor will term it as "Charge Off" and do one of two things:

1.  Sell it to a Collections Agency (whereby said Collections Agency is now the legal owner of this debt)

2.  Authorize a Collections Agency to attempt to collect the debt on their behalf (and the orginal creditor is still the legal owner of the debt)

 

There are some fine details as to what things look like on the three CRA Credit Reports as determined by if #1 or #2 happens.  Bottom line, though, is that you will have a Charge Off on your Credit Reports.  A Charge Off is the second worst thing that one can have (with a bankruptcy being the worst).

 

This Charge Off will stay on your Credit Reports for seven years and six months from the "Date of First Delinquecy".  So, if (as an example) you first missed a payment in April, 2019 and then again in May and June and July and August and then again in September the creditor is likely going to term this account as a "Charge Off" in September, 2019 ***BUT*** the Date of First Delinquecy (or, DoFD) is going to be April, 2019.  That is the month/year when that clock starts ticking (and seven years and six months is a long long time....) as it is the first "late/missed" payment in the string of six late/missed payments that directly lead to the original creditor terming this account as a Charge Off.

 

Like I mentioned, you still owe the debt.  And, the "Creditors" have a tool at their disposal that they can use to help encourage you to pay: updating the account.  Most people in these forums will mention "they are updating my account every month...." but I am experiencing the situation by which the creditor is updating the account every week or, at worst, every other week.  And my Charge Off was paid in-full in December, 2020.

 

So, what does the creditor updating the account every week or month do?  It makes that account look like it is still fresh and active.  And this suppresses your credit score.  What is supposed to happen is that once the balance reaches $0 the original creditor is not supposed to update the account any longer.  But some do....whether it is maliscious or innocent is up in the air.

 

Anyway, a Charge Off hurts your FICO Credit Score for two very specific reasons:

1.  Payment History is not going to look so great.  You have at least six missed payments per Charge Off.  No bueno.

2.  While the account has a balance, that balance counts towards your Credit Utilization.  Often, a Charge Off is more than 100% of the available credit (and that might change as you pay things off....assuming a monthly payment for x period of time).  So, that hurts the credit utilization for that specific account as well as for your overall credit utilization.

 

Now that you have paid as per the agreement that "Balance" field will be updated to reflect "$0".  And that is what you want.  Two things happen there:

1.  The credit utilization for that account goes to 0% and this account no longer affects your total credit utilization

2.  The original creditor is no longer able to update the account (so the "Date Reported" field will be the same as "Last Payment Made" and 'Date Paid" fields).

 

This allows the time to start...

 

Also, the comment put in by American Express is specifically there for any "manual review".  The Balance $0 information is clarified.  It simply tells the humans looking at this account that you reached an agreement and paid a certain percentage of the original debt (in other words, did not pay the entire debt).

 

Keep in mind that Payment History and Credit Utilization, combined, account for 65% of your FICO Credit Score.  So, while the utilization is now lower (potentially a LOT lower) you still have at least 12 missed payments on your Credit Reports.  That is going to adversely affect Payment History for the length of time that these two Charge Offs are on your Credit Reports.

 

Also, sometimes it takes a bit longer than we humans expect for things to show up.  Then, once something shows up, the world (aka, CRAs) need to update their records and run the algorithms that determine your credit score.  So, it could be a few days from the time that the CRAs see the update until they actually take action on the updates.

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Message 4 of 11
surferchris
Valued Contributor

Re: Paying Off Debt Didn't Help My Credit Score

Excellent explanation!

Current Cards:
AmEx Hilton Honors Surpass//AmEx Platinum Card//Ann Taylor Rewards Mastercard//Capital One Platinum Card//Credit One AmEx//Credit One Platinum VISA//Fingerhut//Navy More Rewards AmEx//TruWest Platinum VISA//Aspire VISA//Costco Anywhere VISA//Lowes Advantage//Apple Card
Loans:
1 Mortgage/////Navy FCU Auto Loan (2020 Jaguar I-Pace)//Capital One Auto (2016 BMW i3)
Next Cards (4th QTR 2022):
Navy Flagship Rewards VISA//Chase Sapphire Preferred
Stats:
Scores: 700's // Inq's: 1 for mortgage // Util: 1% // AoOA: 21 yrs

Message 5 of 11
FireMedic1
Community Leader
Mega Contributor

Re: Paying Off Debt Didn't Help My Credit Score


@HowDoesThisAllWork wrote:

Good morning, @shalimarcat !

 

So, this is a common misconception (and I speak from personal experience here).  I, too, am VERY new to this game called credit.  There are lots of things that just dont make sense!  Well, to us humans.  But they make perfect sense to the algorithms that the CRAs use to build your FICO Credit Score (gonna leave the VantageScore stuff out of this conversation....as the forum is - after all - the 'MyFICO' forum!  HA! HA!  But be advised that there is another 'credit scoring model' out there.....and it is called VantageScore - very likely you will see version 3.0 but you could also see version 4.0).

 

Here is - as an example - another situation where my credit score dropped nicely (but it was expected....as I investigated this topic in these forums...).   In February the ex-wife and I finally discussed and handled the marital home.  It was the one thing that we did not finalize in the divorce some 10 years ago.  So, the short version there is that she re-financed under her own merrit and the existing Mortgage and Deed went from "us" to "her".  In other words, the Mortgage that we both had was closed, and she opened up one on her own merrit.  So, that mortgage loan (aka, installment loan) went from open/active to closed for both of us.  Now I no longer have that as an open account on my credit reports.

 

Some 10 weeks later (at the end of April) I paid off my Auto Loan (five months early....go me!  The power of YNAB is awesome and amazing, people!!!!).  So now I have no more open and active "installment loans".  That speaks to "Credit Mix".  My credit score dropped some 25+ points on all three CRAs.  Again, I expected that as I researched this topic in these forums....but had I *NOT* done that I would have been a tad bit surprised.

 

Point there to that ramble.....lots of "common sense" things (again, to us humans) don't quite work out in the algorithms like we think "they should"! :-)

 

Now, to your post.....sorry, I like to talk/type!

 

I am going to ass/u/me that your attourney negotiated a settlement (by which you paid only a partial amount of a debt owed) for these two accounts that the creditor(s) "charged off"?

 

The term "Charge Off" is often confusing for people.  In good ole plain English, the term "Charge Off" is simply an accounting term that the creditors/lendors are able to use to tell the world "Hey, this dude has not made any payments for 180 days and we fear that we are not going to be able to collect this debt so we are going to move this account from our assets page over to our liabilities page and, effectively, we are done with this account".  Now, it DOES NOT mean that you do not owe the original debt (you still legally do indeed).  It just means that the original creditor has given up on their chances of collecting any money.

 

So, typically at the 180-day mark (aka, six consequtive months of missed payments....) the original creditor will term it as "Charge Off" and do one of two things:

1.  Sell it to a Collections Agency (whereby said Collections Agency is now the legal owner of this debt)

2.  Authorize a Collections Agency to attempt to collect the debt on their behalf (and the orginal creditor is still the legal owner of the debt)

 

There are some fine details as to what things look like on the three CRA Credit Reports as determined by if #1 or #2 happens.  Bottom line, though, is that you will have a Charge Off on your Credit Reports.  A Charge Off is the second worst thing that one can have (with a bankruptcy being the worst).

 

This Charge Off will stay on your Credit Reports for seven years and six months from the "Date of First Delinquecy".  So, if (as an example) you first missed a payment in April, 2019 and then again in May and June and July and August and then again in September the creditor is likely going to term this account as a "Charge Off" in September, 2019 ***BUT*** the Date of First Delinquecy (or, DoFD) is going to be April, 2019.  That is the month/year when that clock starts ticking (and seven years and six months is a long long time....) as it is the first "late/missed" payment in the string of six late/missed payments that directly lead to the original creditor terming this account as a Charge Off.

 

Like I mentioned, you still owe the debt.  And, the "Creditors" have a tool at their disposal that they can use to help encourage you to pay: updating the account.  Most people in these forums will mention "they are updating my account every month...." but I am experiencing the situation by which the creditor is updating the account every week or, at worst, every other week.  And my Charge Off was paid in-full in December, 2020.

 

So, what does the creditor updating the account every week or month do?  It makes that account look like it is still fresh and active.  And this suppresses your credit score.  What is supposed to happen is that once the balance reaches $0 the original creditor is not supposed to update the account any longer.  But some do....whether it is maliscious or innocent is up in the air.

 

Anyway, a Charge Off hurts your FICO Credit Score for two very specific reasons:

1.  Payment History is not going to look so great.  You have at least six missed payments per Charge Off.  No bueno.

2.  While the account has a balance, that balance counts towards your Credit Utilization.  Often, a Charge Off is more than 100% of the available credit (and that might change as you pay things off....assuming a monthly payment for x period of time).  So, that hurts the credit utilization for that specific account as well as for your overall credit utilization.

 

Now that you have paid as per the agreement that "Balance" field will be updated to reflect "$0".  And that is what you want.  Two things happen there:

1.  The credit utilization for that account goes to 0% and this account no longer affects your total credit utilization

2.  The original creditor is no longer able to update the account (so the "Date Reported" field will be the same as "Last Payment Made" and 'Date Paid" fields).

 

This allows the time to start...

 

Also, the comment put in by American Express is specifically there for any "manual review".  The Balance $0 information is clarified.  It simply tells the humans looking at this account that you reached an agreement and paid a certain percentage of the original debt (in other words, did not pay the entire debt).

 

Keep in mind that Payment History and Credit Utilization, combined, account for 65% of your FICO Credit Score.  So, while the utilization is now lower (potentially a LOT lower) you still have at least 12 missed payments on your Credit Reports.  That is going to adversely affect Payment History for the length of time that these two Charge Offs are on your Credit Reports.

 

Also, sometimes it takes a bit longer than we humans expect for things to show up.  Then, once something shows up, the world (aka, CRAs) need to update their records and run the algorithms that determine your credit score.  So, it could be a few days from the time that the CRAs see the update until they actually take action on the updates.


Noooooooooo. LOL!!!!!!!!!!!!!!!!!!!!! J/K! Smiley HappySmiley Very HappySmiley LOL


Message 6 of 11
outofcredit
Established Contributor

Re: Paying Off Debt Didn't Help My Credit Score

Agreed.  Great explanation!


Instead of waiting for the storm to pass, I've learned to dance in the rain.
Message 7 of 11
shalimarcat
Regular Contributor

Re: Paying Off Debt Didn't Help My Credit Score

    I appreciate everyone who chimed in to explain this. Thanks for all your help everyone.

Message 8 of 11
HowDoesThisAllWork
Frequent Contributor

Re: Paying Off Debt Didn't Help My Credit Score

@FireMedic1 

 

Ha! Ha!  Hey, did I tell you about the time...... LOL

FICO 8 Scores as of 2022 JULY 04:

FICO 9 Scores as of 2022 JULY 04:

FICO Auto 8 Scores as of 2022 JULY 04:

FICO Auto 9 Scores as of 2022 JULY 04:

FICO Bankcard 8 Scores as of 2022 JULY 04:

FICO Mortgage 2/4/5 Scores as of 2022 JULY 04:

Starting Score: Exp 627
Current Score: Exp 713
Goal Score: Exp 750+

Take the myFICO Fitness Challenge
Message 9 of 11
Onlinecreditnewbie2
Contributor

Re: Paying Off Debt Didn't Help My Credit Score

Depending on what was reported - the data itself, maybe the problem.

What happens when an account is Charged of, unpaid or sent to collections may in fact orphan/corrupt data on that tradeline.

Hope to simply shed some light on the DATA - and, when its not complete or inaccurate, while there is an expectation to have an adverse impact to a consumers credit score occur when event occurs (late payments/charges off etc) - I hope to ensure that the data that's reported, does not hinder a consumers right to progress, and based on algorithms built to calculate scores.

Some high level questions -

Which CRA (s) are reporting the tradeline?
Are you looking at your reports directly from the CRA - printed, or from annualcreditreport.com (printed is best).

For ease of understanding what I am trying to show you -
Go to Annualcreditreport.com (you can get weekly free and from the 2 major CRA's)

Pull Equifax first - this one is the easiest to see, save it, print to PDF.

*******No Third part sites, NO - CRA sites should be used either, as you will care about ALL of the Raw Data.

Once you have it - feel free to cover any identifying information, and post a screen shot of what it looks like, if you would like feedback on all fields.

Otherwise - look at the account(s).

1. Does the description or name of the account say (CLOSED)?
2. Is there an account number?
3. Is Available Credit Populated?
4. Is Debt to Credit Populated ?
5. Is Reported Balance = 0?
6. Is there PAYMENT HISTORY?
7. Terms FREQ - is it Populated?
8. Activity Designator - is it populated?
9. Date of First Delinquency - is it populated?
10. Date CLOSED - what does this say?

The combination of values populated, will complete the tradeline or not, make it appear the tradeline is open - when its not, or simply have orphaned it in its last reported Payment Status.

Take a look when you get a chance - share if you need any assistance.

Have a peaceful day




Message 10 of 11
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