Does Paying Off Derogatory Closed Accounts on Your Credit Report Increase Your Score?

On a credit report, a closed account deals a large blow to a consumer's financial history. Not only does it show that the account holder couldn't pay the bill, but that the debt is old enough to allow for a write-off. Paying this old debt may feel good, but it doesn't serve to increase the credit score in the long run. Some experts even argue that payment may lower the score and re-start the clock on the legal statute of limitations, allowing the negative item to remain on your credit record even longer.

What is a Derogatory Charged-Off Account?

When a bill or debt is more than 30 days past due, a creditor can report the late payment to the three major credit reporting agencies as a delinquent bill. If this debt remains unpaid past 180 days, the creditor can then report it as a bad debt and close the account. When this occurs, the account now includes the notation "charge off," which is a big red flag to future lenders. It's possible to fix the charge-off and get rid of this notation, but it's up to the creditor to consent to the change.

Payments and the Statute of Limitations

A negative credit item stays on a credit report for seven years plus 180 days, after which the credit bureaus remove the notation and raise the score. After this happens, the creditor can still go after the debt, but is powerless to keep updating the status. Financial guru Suze Orman believes that paying up on old debt restarts the debt clock, breathing new life into that seven-year statute of limitations. However, CardReport.com writes, "The time limit is based on the date of the original delinquency (i.e. when the debtor missed a payment and never again became current), not the date of the last activity. Thus, post-charge-off payments should not 'restart the clock.'"

Creditor Negotiations

To pay off a debt successfully and change the notation on a credit report, the debtor must contact the original creditor as soon as possible. The debtor can make an offer to pay the full amount of the past due balance, or may even be able to negotiate the number down to something more manageable. In exchange for this payment, the debtor should insist that the creditor update the file to reflect the newly paid status. Only the original creditor can change the harmful "charged off' notation to "paid" or "paid as agreed," and any agreement pertaining to such should be transmitted in writing before the debtor makes payment.

Avoiding Charge-Offs

The best way to avoid a charge-off situation is to make, at the very least, the minimum payment due. It also pays to call a creditor if difficulties arise that make on-time payment impossible, like sudden unemployment or a family emergency. While creditors want full payment, they'll often negotiate with a troubled borrower in order to avoid later legal action or collection costs. Just a small bit of communication will head off serious credit blemishes in the future. As CardReport.com states, "If you have any charge-offs on your credit reports, your ability to obtain credit will be seriously impaired, and you must actively work to rehabilitate your credit."