Minimizing score damage after a charge-off


Speaking of Credit
Speaking of Credit columnist Barry Paperno
Barry Paperno is a freelance writer and credit scoring expert with decades of consumer credit industry experience, serving as consumer affairs manager for FICO (formerly Fair Isaac Corp.) and consumer operations manager for Experian. He writes "Speaking of Credit," a weekly reader Q&A column about credit scoring and rebuilding credit, for His writings about credit scoring have appeared in The Huffington Post, MSN Money, CBS Money Watch and other consumer finance websites.
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Question Dear Speaking of Credit,
How do I go about fixing my credit score? I have three credit cards that are open. I have three accounts that are closed off by creditors; one of those cards is charged off. Should I even pay the closed accounts or try my best to pay off my three open cards and have them in good standing? I just don't want my money to go to waste when it's not even going to help with my credit score. -- Jessa

Answer for the expert

Dear Jessa,
While it would be nice to be able to choose which debts to pay and not to pay, let me list just a few actions a creditor can take to collect on a debt that may have you thinking otherwise:

  • Collection. A charged-off debt assigned to a collection agency can tarnish your credit reports for about seven years, during which it negatively impacts your credit score. Left unpaid, a collection will not only affect your score, but it can kill a mortgage or other application for credit many years later.
  • Judgment. A lawsuit initiated by a creditor over an unpaid debt can lead to a court judgment that will appear on your credit report for seven years and damage your credit score. If not paid during that time, the judgment can be renewed and spend another 7 years on your credit report wreaking havoc with your score.
  • Wage garnishment. Once a creditor has obtained a judgment against you, the court can also issue an order for debt payments to be automatically deducted from your paycheck for as long as it takes to pay the balance in full. Depending how much is deducted and for how long, your ability to pay your other debts could be seriously impacted if your wages are garnished.

I hope you now understand that unless you were to discharge your debts through bankruptcy, which your situation doesn't seem to warrant, all cards -- open, closed and charged-off -- will have to be repaid one way or another.

Payment strategies
Let's get you moving in that direction by looking at some payment strategies that can ultimately resolve these debts and do so in ways that will help your score in the long run:

Minimum monthly payments:
While making only the minimum is more a matter of treading water than actually resolving the debt, if this is the best you can do while not adding to the balances, consider it a sure way to avoid falling further behind in your payments -- and into deeper financial trouble.

For some time after getting back on your feet in this way, your balances may remain too high to achieve a high credit score, yet, despite the high balances, making at least the minimums will ensure that, until you're able to apply more to the balances each month, you're delivering what the score most likes to see: on-time minimum payments.

Debt management plan (DMP):
Considered an alternative to bankruptcy, DMPs are special payment plans arranged between nonprofit consumer counseling agencies and creditors to accept monthly payments with lower or no additional interest for a set period of time -- typically about five years -- before considering the debt paid in full.

As long as the participating DMP creditor reports the account to the credit bureau as being "current," which it should do if you make your single monthly payment to them on schedule, the score will not only treat the card positively, but with less or no additional interest added to the balance.

Settlement for less than the full amount due:
This solution typically applies to defaulted debt, such as that charge-off of yours that may or may not have been sent to a collection agency, and consists of a lump sum paid by the consumer and accepted as payment in full by the creditor.

When reported to the credit bureau with the description, "settled for less than the full amount due," you should expect a settled account to take a heavy toll on your credit score, though not as heavy as if left unpaid and further actions, such as those noted above, are taken to collect on the debt.

Now that you know there's no easy way out of any portion of your debt, establish a structured payment or payoff plan, and follow through with it until all balances are paid in full or at a manageable level. What will be easy is watching your scores once again headed upward.

See related: Court judgments for debt: your options after the gavel, How wage garnishment works (and how to avoid it), 6 tips for finding the right debt management plan

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Published: September 10, 2015

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Updated: 10-22-2016

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