Debunking Credit Card Myths: Does Paying off Accounts With Negative Marks Help Your Credit Score?
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We spend a lot of time dissecting and analyzing travel rewards credit cards here at TPG. The points and miles you earn on these cards can open up a variety of redemptions like first-class flights and luxurious hotel rooms. However, there are a number of misconceptions out there when it comes to credit cards, so today I’ll continue our new series that debunks these myths and allows you to begin planning for your next vacation.
Previous entries included having too many cards, closing a card you don’t use, not paying your balance in full and paying an annual fee. Today I’ll consider an aspect of your financial profile that seems like it should have an impact on your ability to be approved for a card.
Myth #18: Paying off accounts with negative marks immediately helps my credit score.
Statistics show that roughly 4 out of every 10 Americans are in credit card debt. I have several friends who admit that they didn't think too hard about swiping their cards during college or immediately after entering the workforce, and they are now paying the price. These accounts have been open for quite some time, but many of them may have missed or late payments or have even been handed over to a collections agency.
When you finally reach the point of paying off that account, you may think that you'll immediately see a huge improvement in your credit score. After all, the account is down to a zero balance and may even be closed. Unfortunately, while you may see a slight uptick in your score, the effect is not immediate.
Let's once again revisit the five factors that contribute to your FICO score, the one most frequently used to determine creditworthiness:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
As discussed previously, these five factors are weighted differently based on how important they are to your score:
The second most important factor (amounts owed, commonly referred to as "utilization") clearly improves as you are paying down the outstanding balance on a credit card debt. However, the most important one (payment history) is what can really bite you when it comes to paying down old credit card debts with negative marks like late or missed payments.
There's no way to know exactly how your credit score is calculated, as the three major credit bureaus use their own proprietary formulas (hence why your Equifax score may differ from your TransUnion score). However, all of them use past and present information to make a decision on how you're likely to behave in the future, so this means that negative marks on accounts — even those that have since been closed — can impact your score.
You may be wondering exactly how long it takes for negative information to fall off your credit report, and unfortunately the answer isn't pretty: For many negative marks (including late payments or collection accounts), you'll need to wait seven years for them to disappear.
Fortunately, you don't just need to sit there and wait it out. The credit bureaus are continually reevaluating your credit history based on all of the five factors listed above, so the more positive actions you can show (like paying your balance in full and on time every month, keeping your utilization low, etc.), the better. This will indicate to both the bureaus and credit card issuers that you can effectively manage the credit that has been extended to you, making you more attractive when it comes to gaining access to additional credit.
For additional recommendations for managing your credit card account(s), be sure to check out my Ten Commandments for Travel Rewards Credit Cards.
Unfortunately, even when you finally pay off and close an account with late/missed payments or other negative items, it can take up to seven years for those items to disappear and stop impacting your score. However, even though this takes time, you should continue to manage your credit effectively and could still be approved for new cards like the Chase Sapphire Reserve Card. Remember that issuers simply want to see positive trends so they know you aren't likely to default. Hopefully this post has given you some insight into how negative marks can impact your score.
How have negative marks affected your credit score?