Partial payment agreements can hurt your credit score

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 for the expert

Dear Speaking of Credit,
I'm trying to pay off debt. I recently paid off several cards with a lump sum of money that I was given. How long will this take to show up on my credit report? All of the cards were in good standing. I'm going to have to apply for a car loan and wanted to get the best rate I could. I'm showing currently a credit score of 709. I just also negotiated with Chase bank to close my account, which is in good standing, but the two cards have high balances and I have entered a payment plan with a lower interest rate. Will this penalize me on my credit report? -- Paige

Answer for the expert

Dear Paige,
The length of time it takes a payment to appear on a credit report depends on how soon before the statement date you pay it, how soon the creditor reports the updated information to the credit bureaus and then how soon the credit bureaus post the payment information. Typically, such updates will show up on your credit report within 30 days after the statement date following your payment.

There's no need to worry about being penalized for having closed the two Chase cards, since your credit utilization will continue to be calculated in all of the same ways as when they were open and for as long as you continue to owe on the now-closed cards. When the balances ultimately reach zero, their utilization percentages will no longer be included in your score, which shouldn't affect your credit scores if your other card balances remain low. Also, once paid off, the closed cards should remain on your credit reports and continue contributing credit history to your scores for about 10 years after the closing date.

You have reason to feel good about the recent card balance payoffs and the lower interest you will be paying on the remaining balances, yet I'm going to have to point out a potential bump in the road to try and avoid if the plan you entered with Chase also includes a reduction in your monthly payments.

When you enter a payment plan in which a lender agrees to accept smaller-than-standard payments, the notation "Partial payment agreement" is often added to the account's credit report trade line. While seemingly innocent enough, these three words can wreak havoc with your FICO credit scores by triggering the kind of negative scoring treatment typically associated with charged-off debts, collections and accounts included in bankruptcy -- at times, amounting to more than a 100-point score drop -- that won't begin diminishing in impact until the balances are paid off or you exit the plan, whichever comes first.

Hopefully, what I've described won't be your experience, as the addition of this comment depends on whether reduced payments are part of the plan and how Chase chooses to report it. To find out for sure, I would recommend that you wait until about 30 days after you've made your first payment under the payment arrangement, then order your up-to-date Equifax, Experian and TransUnion credit reports from, and review them carefully to verify whether this verbiage has been added to the reporting of your Chase cards.

Unfortunately, FICO credit scores are not included with these reports, so if you have any scoring concerns after reviewing your credit reports, you may want to obtain your FICO-scored reports from any of the credit bureaus whose reporting gives you cause for concern. The score factors (aka "reason codes") and their explanations that accompany the scores should provide the best clues into how your scores are being impacted by the information in your credit reports.

If you find that your Chase cards are in fact being reported in this negative manner, be aware there's an alternative type of payment plan that reduces interest and payments without trashing your score. Instead of the "Partial payment agreement" description, accounts being paid under a debt management plan arranged and administered by a nonprofit consumer counseling agency uses a different description, "Consumer counseling account," which, fortunately for your scores, carries a neutral -- that is, nonderogatory -- treatment, as long as the payment arrangements are being kept.

To learn more about consumer counseling debt management plans, contact your local nonprofit consumer counseling agency affiliated with NFCC (National Foundation for Consumer Counseling) or AICCCA (Association of Independent Consumer Credit Counseling Agencies) to see if one of these plans might provide you with a better alternative.

Something additional to consider, should you find that the payment plan is negatively impacting your scores and a consumer counseling agency plan won't work for you, is that your scores can still be salvaged once you have exited the plan, either before payoff or upon completion. Once the plan has been terminated, Chase should remove the "Partial payment agreement" notation from your credit report. However, you will most likely have to proactively request its removal and submit a dispute to the credit bureaus. 

Again, I truly hope the credit horrors I've described won't apply in your situation and that, if nothing else, you are now better informed as to how your scores can be impacted by such payment plans, that there is at least one viable alternative and that either way there's a light at the end of the tunnel.

See related: Yay! 3 cards paid off. Now what?, There's no quick credit score fix, Don't default on a stipulated judgment

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Updated: 01-22-2019