How your credit score reflects paid-off accounts
By Todd Ossenfort
The Credit Guy
The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues.
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Dear Credit Guy,
When you pay off a credit card, how long does it take to show positive on your credit report? -- Lynda
The short and long answer to your question is, it depends. In general, accurate negative information on your credit report will remain for seven years from the first date of delinquency (typically 180 days from your first late payment). Chapter 7 bankruptcies will remain for 10 years and some tax liens will remain indefinitely.
So, your credit report is going to reflect all the actions on your credit card account. For example, if you did not pay the account for many months, the lender would have been required by law after 180 days to claim the balance as a bad debt, and that would be reported to the credit bureau as a charge-off. In addition, the account would have been reported as 30, 60, 90, 120 and 150 days late before the charge-off occurred. Then, if the account was placed with collections, either with the same lender or an outside collector, the account would be listed as a collection account.
When a payment is made, depending on where the account is in the process, it will be reflected on the collection account, original credit card account or both. For example, if you paid the entire amount due, the original credit card account and the collection account would be marked as paid in full. If you pay less than the full amount, but for an agreed upon settled amount, the account will reflect a settled for less than full balance notation.
So, if you were 90 days late on your account and you paid the balance in full, your credit report will reflect that the account was paid in full, but the 90-day late will also still be listed in the history of your account. A paid-in-full account with a 90-day late notation is not going to impact your credit score nearly as much as a paid in full charged-off account.
In general, the more time you put between any negative item on your credit report and when anyone will be evaluating you for a loan or various other reasons by reviewing your credit report, the less impact the negative item will carry. A negative account that is three to five years old is not going to carry near the weight that a three- to five-month-old account will.
If the paid credit card account does not have any negative history associated with it, and you paid it off to decrease your credit-used-to-credit-available ratio, the improvement in your credit score will be immediate. If, however, the account was closed after you paid it off, and it was one of your longest standing accounts, your score will most likely decrease somewhat. The reason closing a long-standing account lowers your credit score is because length of credit history is 15 percent of your FICO score.
As with all credit improvement advice, the best thing you can do is pay all your accounts on time and as agreed. Continue to add positive information to your credit report, and the negative information will eventually impact your credit score less and then will drop off your report completely.
Take care of your credit!
See related: How debt settlement works, how it affects credit scores, Credit reports and credit scores
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
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Published: July 6, 2009