Debunking credit card myths: Does paying off accounts with negative marks help your credit score?
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
We devote a lot of coverage to travel rewards credit cards here at TPG.
When you sign up for new cards and then utilize them strategically at various types of merchants, you open up the ability to redeem your points and miles for things 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.
Let’s consider an aspect of your financial profile that seems like it should have an impact on your ability to be approved for a card.
Want more credit card news and advice? Sign up for TPG’s daily newsletter
Myth: Paying off accounts with negative marks immediately helps my credit score
Statistics show that roughly four 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.
Related: Ten commandments for rewards credit cards
Unfortunately, even when you finally pay off and close an account with late or 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 some of the top credit cards. Remember that issuers simply want to see positive trends so they know you aren’t likely to default.
Additional reporting by Chris Dong.
Featured photo by Rawpixel/Getty Images.
Welcome to The Points Guy!
WELCOME OFFER: 80,000 Points
TPG'S BONUS VALUATION*: $1,600
CARD HIGHLIGHTS: 3X points on dining and 2x points on travel, points transferrable to over a dozen travel partners
*Bonus value is an estimated value calculated by TPG and not the card issuer. View our latest valuations here.
- Earn 80,000 bonus points after you spend $4,000 on purchases in the first 3 months from account opening. That's $1,000 when you redeem through Chase Ultimate Rewards®.
- Enjoy benefits such as a $50 annual Ultimate Rewards Hotel Credit, 5x on travel purchased through Chase Ultimate Rewards®, 3x on dining and 2x on all other travel purchases, plus more.
- Get 25% more value when you redeem for airfare, hotels, car rentals and cruises through Chase Ultimate Rewards®. For example, 80,000 points are worth $1,000 toward travel.
- With Pay Yourself Back℠, your points are worth 25% more during the current offer when you redeem them for statement credits against existing purchases in select, rotating categories
- Count on Trip Cancellation/Interruption Insurance, Auto Rental Collision Damage Waiver, Lost Luggage Insurance and more.