Many of us have doubts regarding how charge-off will be reflected in the credit report even after repaying the debt in full. First and foremost one needs to understand is that a debt has to be cleared come what may, even if is a charge-off. Most people are under the impression that charge-off need not be paid, but that is a myth. You owe the debt till you pay.
Even after clearing the full amount, this does not get reflected in the credit score immediately; rather the negative is much more accurate. Let us see how it works.
The credit card account that was not paid can reflect in 3 different ways in your credit report. All of them are unfortunately negative. Firstly, the original credit card account is listed as a “charge-off.” If this charge-off account, in case, is retained by the original creditor for in-house collection, then once you pay the account it is either listed as “ settled” or “paid charge-off” depending on whether you pay the full amount that you owe.
Secondly, if in case the credit card company sold your account to a collection agency, then the collection account is listed and if the collection agency and you come to an agreement for less than the full amount of your account then that is listed as settled.
Thirdly, if you received a court order for clearance of the debt on your credit card then that account is listed on your credit report under the public records section.
Now how does your clearance of the debt reflect in your credit report? Actually, the creditors report your credit history to the bureaus and they have to report that you paid. And you indeed want your credit report to reflect that your account was paid. The interested parties especially potential lenders, review your credit report, and they want to see that you have paid, even if it was late either for less than or the full the total amount that is due. But, the fact that you paid will not immediately have a positive effect on your credit score, because the negative listings are accurate and they will remain for seven years on your credit report, starting with the delinquent act of not paying that led to your charge-off. You should always remember that credit scores are developed by taking your past credit history into account. Therefore your credit report is tarnished till you add more positive information in future.
Therefore this one will have a lesser negative effect on your credit as time goes by. If you had a credit score of 680 your score will drop 45 to 65 points before the settled account and 105 to 160 points if the score is 780. The good news is that it takes anywhere between two and three years for your credit score to show recovery. Only if you don’t have any other new negative listings on your credit report.
Therefore, it is advisable to keep your accounts paid on time and as agreed from now on, so that the credit score improves over time.