Is there an upside to paying on a charged-off credit account?
September 14, 2017 6:17 AM   Subscribe

My partner and I are in a debt management program, and I have recently figured out that one of our creditors is reporting the debt as charged off. Does it make sense to keep paying on it?

Checking our credit reports recently, I discovered that one of the credit accounts we're paying off through a debt management program is reporting the account as charged off to the credit agencies. I asked one of the counselors at the program about it, and she sort of hand-waved me with "it's always good to pay a debt, and when you pay it off your credit report will get a little bump." But if the company in question is going to keep reporting it as charged off--meaning they are reporting the that they've written off the debt--will there really be a bump in our credit report? Is there an upside to paying on a charged-off debt?

I'm not asking about our moral or ethical responsibility to pay the debt. This is strictly a question about whether it does any good, credit-wise, to pay on a debt being reported as charged off. Also, since it's part of our structured debt management program, it's probably moot in practice. Perhaps I'm just wondering how much smoldering resentment I should be feeling, as paying on a debt that's being reported as charged off feels like the worst of both worlds.
posted by Orlop to Work & Money (7 answers total) 2 users marked this as a favorite
 
How are the fees at the debt management company calculated? Did they assume the debt at a lower price?
posted by amanda at 6:35 AM on September 14


This is strictly a question about whether it does any good, credit-wise, to pay on a debt being reported as charged off.

A charged off debt is not anything resembling forgiveness - it's the company accepting that they are not likely to recover the debt. They will still recover it, or part of it (through a debt agency) if they can. It's an accounting mechanism and not a signal that the company doesn't want their money.

A charged off debt can still stay on your credit report for up to seven years. Not paying it is akin to not paying any other debt - i.e., for creditors (or landlords, or sometimes employers in certain jurisdictions), it will signal you are unable to meet your existing credit obligations and will hamper your ability to fix your credit score.
posted by notorious medium at 7:36 AM on September 14 [4 favorites]


I would ask for more info from the program. Don't let them hand-wave you if you get the sense they're only interested in increasing their profits. Who owns the debt and who is your program paying? In other words, is your debt management program paying this money to the original creditor, or to a collection agency that bought the debt? Did your debt management company get an agreement from whoever owns the debt that they will clear your credit report once you've paid this off?

In my experience, paying the original creditor directly, if they have sold your debt to a collection agency, will NOT improve your credit, but paying the collector will IF they notify 1) the original creditor and 2) the credit reporting agencies that the debt is cleared. I don't have a lot of trust that collection agencies will do the right thing, so you should get assurance from your program that this will be the result.
posted by kapers at 8:12 AM on September 14 [1 favorite]


And yes, "charged off" debt is TERRIBLE for your credit. That's why you need assurance that repayment will clear the charge off from your report.
posted by kapers at 8:18 AM on September 14


Thanks. FWIW, the original creditor owns the debt, our debt management program has no financial incentive in us paying it.

The question kapers raises is the one I need a clear answer to: whether paying off this debt will actually improve what's being reported to credit agencies or not. I need to go back to the program with clearer questions.

A charged off debt can still stay on your credit report for up to seven years. Not paying it is akin to not paying any other debt - i.e., for creditors (or landlords, or sometimes employers in certain jurisdictions), it will signal you are unable to meet your existing credit obligations and will hamper your ability to fix your credit score.

Right, but what I'm saying is that it's being reported as charged off even though we're paying it. So we're taking the credit score hit either way, and, having realized this, I'm feeling a little grumpy about the fact that we are paying it as agreed but being reported as not paying it.
posted by Orlop at 4:49 PM on September 14


You might consider Googling for "tradeline deletion" and investigating whether you can negotiate something that might accomplish your goals.
posted by cribcage at 8:19 PM on September 14


Right, but what I'm saying is that it's being reported as charged off even though we're paying it. So we're taking the credit score hit either way, and, having realized this, I'm feeling a little grumpy about the fact that we are paying it as agreed but being reported as not paying it.

You have every right to feel grumpy about it, however the end result is the same - the faster you pay this debt off, the better your credit score will get. Your question was - strictly speaking, whether or not paying off a charged-off debt benefits your credit score.

The answer is categorically yes.
posted by notorious medium at 7:36 AM on September 18


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