Score implications when paying off a charged-off account

There’s a common misconception out there that you should never touch a charged off account because if you pay it off it, the score’s gonna decline. And there’s a reason that misconception is out there, right? Because that can happen. But in most cases that’s not going to happen. So, so let me explain, um, first of all, I’m only referring, uh, to the scoring models that are in use in the mortgage industry. You know, those scores that you’re gonna see on a mortgage credit report, this information doesn’t apply to recent scoring models like FICO nine or FICO 10, or even vantage 3.0. So, um, charged off accounts, uh, are factored into revolving if they’ve been reported during the past year. So even though they’re closed, uh, they typically have a balance.

Those are the ones we’re talking about here. They wouldn’t have anything to chart off if they didn’t. Um, so they have a balance and they’re usually highly, if not overutilized. So, because they’ve allowed it to go late and then reach that status of, of in, in collections and then charged off they’ve accrued additional fees. They may be 115% utilized. So having obviously that high of a utilization on an account can have a negative impact on revolving utilization. So paying that account off can provide a benefit there on one bureau, however, paying it off due to the way the information is and how the scoring model looks at it. It can make that negative behavior associated with that account appear more recent to the score. And that’s where it can cause a decline. So what likely happened is, you know, somebody carried it out in the past, they got burned by it.

So they just say, you know, don’t touch charged off accounts. The reality is in most cases is it’s gonna help. Um, in some cases it’s not gonna do any have any impact. And in some cases it’s gonna cause a decline, you know, but that’s the exception, not the rule. So always simulate it in the credit expert, what I’ve simulator before carrying it out. So you can have an idea of what the impact is gonna be. Even on that bureau where it can look more recent, they have other recent negative behavior. This isn’t gonna make ’em look any worse. So they’ll just get the benefit for improving revolving utilization in a case like that, like all things credit score, the whole profile matters, right? Cause it’s the whole relationship of the information amongst each other. So another recent late then this recent, you know, this becoming more recent, isn’t gonna make it any worse. So, um, be sure to simulate it. If you have any questions for us here, credit expert, please don’t hesitate to.

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