Should I Pay Off Closed Accounts on Credit Report?
If you fall behind on payments for one of your credit accounts, you will likely see on your credit report that the debt has been closed or charged off. As you might expect, this has repercussions on your credit score and credit report. When that happens, you need a solid understanding of your options to make a wise decision. Your long-term financial well-being depends on it.
What Does a Closed Account Actually Mean?
If you have a closed account, your credit report will show whether it was closed by the account issuer or closed by you. The account issuer might have closed it because of inactivity, late payments, consistently exceeding your credit limit, or you’ve stopped making payments.
Conversely, you might have closed the account yourself because you don’t need it, you don’t want to pay the fees, or the card has been used fraudulently.
As a general rule of thumb, it is NOT recommended to close a credit card that is in good standing. This can cause your credit score to decrease since payment history accounts for 35% of your credit score. If you’ve had a card for several years and you don’t need it, it may be best to keep it anyway.
Impact to Payment History and Utilization
Closing a credit card also reduces the total available credit associated with your financial standing. When you close a credit card, all pending balances with other credit cards now seem larger compared to the lower overall available credit. For example, if you were using only 30% of your available balance, closing a credit card may increase that percentage to 40% or 50%. By doing that, creditors interpret the higher percentage as higher financial distress. This will probably lower your credit score.
How does a Charge-Off Work?
A charge-off is when the creditor or lender writes the account off as a loss, so the account is closed to future charges. That doesn’t mean you don’t owe the debt. You still have to pay for it. However, you may have to pay the debt buyer or the collection agency instead of the original lender if the debt was sold or transferred to them.
Charge-offs typically happen between 120 and 180 days after you miss a payment or become delinquent. This derogatory mark can remain on your credit report for up to seven years. However, lenders and creditors will most likely call or send letters to remind you of the unpaid amount before selling it to a debt buyer or transferring it to a collection agency.
How Much Can a Charge-Off Impact Your Credit?
Missed payments alone can significantly hurt your credit as payment history plays a pivotal role in determining your credit scores. However, your credit score will likely deteriorate further if your account displays as a charge-off. Also, if it ends up in collections, it could decrease your credit score. Avoiding paying the collection agency can harm your credit even more, as the agency can report it to the credit bureaus.
Nonetheless, if you use credit responsibly moving forward, <b>the impact of derogatory marks on your report can start to wane after roughly two years. That’s a long time if you’re trying to make big financial moves. But if you’re not in any rush, the Fair Credit Reporting Act (FCRA) gives you the right to have harmful information such as charge-offs deleted from your report after seven years.
Should I Pay off Closed Accounts on Credit Report?
It depends on whether it’s accurate. Below are the things to look for to ensure it’s correct.
- Your account can be sold to collection agencies. Ensure every sold account displays as closed and has a zero balance. Only the newest collections should show as open.
- Check the remaining balance. If it’s more than what you believe it should be, demand that the creditor justify extra costs or rectify wrong information.
- Check the charge-off date on the original account along with any subsequent accounts in collections. The charge-off date should be the same as the date of your first delinquent payment on the original one.
If you find the charge-off is inaccurate, don’t pay it. You can file a dispute or work with a credit repair company to solve this issue.
If, however, the charge-off is legitimate, consider paying it off. Debt settlement is a viable option. It’s tempting to NOT act, but as long as the debt is yours, you’re legally responsible for it until it’s paid, settled, or discharged in a bankruptcy filing. Moreover, the charge-off can reduce your chances of getting a loan. Some lenders may even ask you to pay all remaining debt before allowing you to get a loan.
How to Pay Closed or Charged-off Accounts?
There are a few ways to pay closed or charged-off accounts. You can work with the original lender, settle the debt, or pay the collections agency.
Work with the Original Lender
If the debt wasn’t transferred to a collection agency, you can arrange payment with the original lender. Once you pay it off, the lender should mark it as ‘paid charge-off’ and change the balance to zero. Lenders and creditors tend to view paid charge-offs more favorably compared to one that still has a balance.
Settle the Debt
If you try to settle the debt and the original lender or the collection agency accepts less money than initially agreed, it should show on your credit report as a ‘settled’ charge-off. That can negatively affect your score, but at least the account won’t end up in collections.
Pay the Collection Agency
If the lender or creditor transferred the account to a collection agency, you should pay the agency. After you pay it off, the account will show as ‘paid collection’, and lenders may see it as more favorably than an unpaid account. Some collection agencies will agree to remove the collection from your credit report altogether once it’s paid.
Will the Debt Remain if I Pay It?
Yes, a paid collection will remain on your credit report but as we mentioned earlier, you should try getting the creditor (or collection agency) to agree to remove the charge-off or collection once you pay (or settle) it.
Improve Your Credit Score
Once you take care of your debts, take the necessary steps to improve your credit. A professional credit analyst can help you. At White, Jacobs and Associates, we offer a free consultation where we review in detail your financial situation and determine the best way to improve your credit if we see you as a good candidate. Contact us.