Does Paying Delinquent Accounts Help Your Credit Score?

A delinquent account arises when a payment on a debt is missed and remains unpaid beyond a specified grace period. A credit score is a numerical representation of an individual’s creditworthiness, used by lenders to assess risk. This article explores how resolving delinquent accounts influences one’s credit score.

Understanding Delinquent Accounts and Credit Scores

A delinquent account is a debt not paid by its due date. Creditors typically report payments as late to credit bureaus after 30 days, though late fees may apply sooner. Delinquency progresses through stages (30, 60, 90, or 120 days late), with each stage increasing the negative impact on a credit score.

An account may become a “charge-off” or be sent to “collections.” A charge-off occurs when a creditor deems a debt uncollectible, often after 180 days of missed payments, writing it off as a loss. The borrower remains legally obligated to pay. The original creditor may then sell the debt to a collection agency, resulting in a “collection account” on the credit report.

Payment history is the most significant factor influencing a credit score, accounting for 35% of the FICO Score. Delinquent accounts severely damage this component, as they indicate a failure to meet financial obligations. The impact intensifies with the severity of the delinquency; a 90-day late payment affects the score more negatively than a 30-day late payment.

The Direct Impact of Payment on Credit Score

Paying a delinquent account changes its status on a credit report, but does not remove the negative entry. For example, a “charge-off” may become “paid charge-off,” or an “unpaid collection” may become a “paid collection.” This updated status signals to lenders that the debt is resolved, which is more favorable than an unresolved status.

The original negative event, such as a late payment or charge-off, remains on the credit report for up to seven years from the original delinquency date. While the account’s status improves, the historical record persists. The initial impact on a credit score, when the delinquency is first reported, is often the most significant.

The effect of paying off a delinquent account varies by credit scoring model. Newer models, such as FICO Score 9 and VantageScore 3.0 and 4.0, may disregard paid collections or give them less weight, potentially leading to score improvement. Older FICO models, including FICO Score 8, may not differentiate as much between paid and unpaid collections, so the score might not see an immediate boost.

If a debt is sold to a collection agency, both the original charge-off and the collection account may appear on the credit report. Paying the collection agency updates the collection account to “paid,” but the original charge-off from the creditor may still remain. It is advisable to pay the debt, as it prevents further collection efforts and additional interest or fees. A “paid” status can also appear more responsible to lenders who manually review credit reports, even if the automated score does not immediately reflect a significant increase.

Medical collections have specific credit reporting rules. Paid medical collections are no longer included on credit reports. Medical collections under $500 do not appear, and medical bills generally do not appear until unpaid for at least one year. These changes lessen the impact of medical debt on credit scores, as it is considered less predictive of credit risk.

Other Credit Score Contributors

Delinquent accounts are only one aspect of a credit score. Other factors significantly influence this numerical summary of creditworthiness.

Credit utilization, the amount of credit used compared to total available credit, accounts for 30% of a FICO Score. Maintaining a low utilization ratio, generally below 30%, indicates responsible credit management and positively impacts the score. High utilization suggests over-reliance on credit and can lower the score.

The length of credit history contributes about 15% to a FICO Score. This factor considers how long accounts have been open, the age of the oldest and newest accounts, and the average age of all accounts. A longer history of responsible credit use generally leads to a better score, as it provides more data for lenders to assess.

Credit mix, or the variety of credit accounts managed, makes up about 10% of a FICO Score. This includes revolving credit, like credit cards, and installment loans, such as mortgages or auto loans. Demonstrating the ability to handle different types of credit responsibly can be beneficial.

New credit, including recent applications and newly opened accounts, accounts for approximately 10% of a FICO Score. Each time new credit is applied for, a “hard inquiry” appears on the credit report, which can cause a small, temporary dip in the score. Opening multiple new accounts in a short period can also lower the average age of accounts and signal increased risk to lenders.

Steps for Credit Improvement

Improving a credit score involves consistent, responsible financial habits. Regularly obtain and review credit reports from Experian, TransUnion, and Equifax to ensure accuracy. Dispute any errors, as inaccuracies negatively affect a score.

Consistently making all payments on time is paramount, as payment history is the most influential factor. Establish a routine for timely payments across all accounts, including credit cards, loans, and utility bills. Setting up automatic payments or reminders can help avoid missed due dates.

Maintain a low credit utilization ratio by keeping credit card balances below 30% of the total available credit. Reducing outstanding debt and avoiding maxing out credit cards significantly improves this ratio.

Exercise caution when opening new credit accounts. While a diverse credit mix is beneficial, opening too many new accounts quickly can lead to multiple hard inquiries and lower the average age of accounts, negatively impacting the score. Pursue new credit only when necessary.

Over time, demonstrating responsible credit management across various account types, including a mix of revolving and installment credit, strengthens a credit profile. These actions collectively contribute to building a positive credit history and improving one’s credit score.