debt

Old charge-off accounts sting credit report

Steve BucciQuestionDear Debt Adviser,
I had a judgment against me for $6,600 from a credit card company. The settlement was paid in full. I received a letter from the credit card company stating the debt was "paid in full" releasing me from any future debt. I filed the letter with the courthouse. How does this get in my credit report that this debt has been paid in full?
-- Todd

AnswerDear Todd,
Your one credit card account that went unpaid has likely blossomed into three different notations on your credit report. All of which, unfortunately, are negative. First, the original credit card account will likely be listed as a "charge-off." If the original creditor had kept the account in-house for collection after the charge-off, once you paid the account it would either be listed as a "paid charge-off" or as "settled," depending on whether you paid the full amount owed.

Second, if the credit card company sold the account to a collection agency, the collection account will be listed. If you came to an agreement with the collection agency for less than the full amount of $6,600, that account will probably be listed as "settled."

Third, and last, the judgment associated with the account will be listed under the public records section of your credit report.

How does the update of your payment get on your credit report? The creditors who report your credit history to the bureaus have to report that you paid. And you do want your credit report to reflect that the account was paid. Interested parties reviewing your credit report, especially potential lenders, will want to see that you did pay, even if it was late and/or for less than the total amount due. However, the fact you paid will not have an immediate positive effect on your credit score. The negative listings are accurate and will remain on your credit report for seven years, starting with the delinquency that led to your charge-off. Remember, credit scores are developed by looking back at your credit history. Yours will be tarnished until you add more positive information over time.

We all make mistakes, and this one will have less and less of a negative effect on your credit as time passes. The elves at FICO say your score will drop 45 to 65 points if you had a credit score of 680 before the settled account and 105 to 160 points if your score was 780. The good news is it should only take between two and three years for your credit score to show recovery. If, of course, you don't have any other new negative listings on your credit report.

My advice is to accept the settled account as a life lesson learned, and move forward with the plan to keep your accounts paid on time and as agreed from now on. To do so, you will need a spending plan and an emergency savings cushion of six to 12 months' worth of living expenses.

I have one last consideration for you. Should you find yourself looking for a new job over the next several years, be aware that employers often pull credit reports as part of the hiring decision. Many prospective employers, upon seeing a charge-off or settlement on your report, may not ask you what happened and just go on to the next candidate. Be prepared with a good explanation of what happened, what you learned and why it won't happen again. By volunteering this information before your report is pulled and reviewed, you may gain some points in the integrity component of your interview.

Good luck!

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