Can Paying off a Charge-Off Account Make Your Credit Scores Go Down?

A charge-off is one of the worst items that can show up on your credit report, so you'll probably want to do damage control and pay it off. In the past, paying an old debt usually damaged your credit history. However, as of 2011, paying a charge-off account may improve your credit rating and even eliminate record of the account.

History

The major credit scoring system in the United States -- the Fair Isaac risk model -- used to punish consumers for paying old debts because payments renewed the date on the debt, making it looking more recent than its actually date of delinquency. As of 2011, paying a charge-off or collection account makes almost no difference to your credit rating; just having a charge-off on your credit report at all is a detriment to your rating, whether you pay it or not.

Debt Burden

Paying a charge-off probably will raise your credit score a few points, because an outstanding charge-off counts against your debt burden in to the FICO system. Your debt burden counts for 30 percent of your FICO rating, so paying off thousands of dollars of charge-off debt can raise your score significantly. The FICO formula is a trade secret, which means nobody can say how much paying a charge-off will raise your credit rating.

Considerations

Lenders and anyone else who looks at your credit report, such as an employer, like to see paid charge-off accounts because they show high integrity, because you paid a debt even though you could have let the statute of limitations expire or force the creditor to collect. If you and another applicant for a job are equally qualified, paying a charge-off may tip the scales in your favor. The same can happen when a lender is having a tough time deciding whether to give you a loan.

Pay for Deletion

If possible, talk to the original creditor about deleting the account with the credit bureaus in return for full payment on the debt, or pay for deletion. Only the original creditor of the account can substantially improve your credit rating. If you offer a pay-for-deletion deal with a collection agency, the payment history -- including missed payments -- on the original still affects your credit rating.