Does Paying Off Charged-Off Accounts Bring Up Credit Scores?

So you were a little -- or very -- irresponsible with your credit in the past. Now, your credit report is littered with charged-off accounts and your credit score's in the trash. Don't wait seven years for those charged-off accounts to drop off your credit report, but don't get in too big a hurry to pay them off, either. While paying off charged-off accounts won't hurt your credit, it won't improve your credit score, either.

Charged-Off Accounts

A charged-off debt is, by definition, a debt that is 120 to 180 days past due. However, for consumers, the term "charged-off" can be misleading. While to the financial world, a charged-off account is one that auditors or accountants have told a creditor to take off the books, because, due to a lack of payments on the debt, it appears that the debt is unrecoverable, to consumers, there is often the assumption that charged-off debt is debt no longer owed. That is not the case. You still owe the debt, but the creditor has accepted the fact that getting payment won't be easy.

How Charge-Offs Affect Credit Scores

There's nothing that brings down a credit score more than paying debts late or not at all. Therefore, by the time a debt is charged off, the damage is done to your credit report; the charge-off is, in a sense, the final blow. The number of charge-offs versus current accounts often affects your credit score more than the charged-off accounts alone. If, for instance, you have four credit accounts, and one is reported as a charge-off, while the others are in good standing, the damage is less than having four accounts, all of which have been charged off.

Paying Off Charged-Off Accounts

Paying off charged-off accounts won't improve your credit score overnight, but it may help you plead your case with potential lenders. "From a credit scoring standpoint, there is not a big difference between a paid or unpaid charge-off," writes Bankrate's Steve Bucci. "However, from the point of view of a lender considering you for a loan or an employer reviewing your credit report as part of the hiring or promotion process, accounts listed as paid can make a big difference."

Using Other Accounts to Make Improvements

If your credit score is trashed due to multiple charge-offs, by all means pay off the charge-offs as you are financially able, but do not rely on paying these debts to improve your credit score. Rather, diminish the effect these old debts have on your credit by creating a better credit history. Pay bills in full, on time. Pay down high credit card balances, and open new accounts sparingly. Given time, your credit score will improve, and those charge-offs will become ancient credit history.