When a Charge-Off Helps Your Credit Score: What is the AAoA

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A Charge-Off on a credit report can spell disaster for your credit score. Consumers may experience a decrease in credit scores by as much as 100 points or more. Additionally, most creditors transfer or sale old debt to collection agencies which means the collection agency can also place a negative mark on your credit reports, causing your scores to take an even steeper dive.

But not all charge-offs are necessarily hurting your credit score. For instance, consumers can sometimes be shocked when their credit score drops after successfully getting a charge-off removed.

The reason behind the score drop is that as time passes the negative impact of the charge-off diminishes while the age of the charge-off account actually helps your credit history. An older charge-off account is put right in the mix of credit and contributing to your average age of accounts (AAoA).

What is the Average Age of Accounts.

The average age of accounts is simply the average age of all of your accounts using the date the account was opened until present; then dividing that number by the number of accounts you have. For example, if you have 2 accounts that are 5 years old and 7 years old respectively your “average age of credit” will be 6 years.

Credit account information that is being added to or removed from your credit reports causes your average to change. Sometimes this can have negative consequences. For instance when you open a new credit card account; that new account will be included in the number accounts on your credit report and will lower the average age of all your accounts.

FICO likes to see established accounts.

FICO considers an older charged-off account an established account that is calculated into your average age of accounts.

That’s not to say creditors, especially mortgage loan underwriters, will overlook multiple charge-offs. Some banks and credit card companies may require charge-offs be paid before they grant new credit not to mention all mortgage lenders will require charge-offs be paid before approving a mortgage loan.

But the AAoA does matter to your credit score. Newer accounts, for example, will lower the average account age, which in turn could lower credit scores. Opening new accounts is a necessary part of building or rebuilding credit but new credit applications should be completed sparingly and only as you need them.

In the case of collection accounts, they do not contribute to the average age of accounts as they are not original trade-lines. Deleting a collection account is more likely to increase your credit score than lower it.

Recent charge-offs like those in the past 12 months are really a credit score killer. But as time goes by it matters less. By the time a charge-off reaches 48 months or older, it is no longer negatively impacting your credit score but contributing towards average age of accounts. At this point removing a charge-off has the potential to decrease a credit score.

Keep in mind the AAoA is not the same as your length of credit history. Length of credit history accounts for 15% of your credit score. It dates back to your oldest open or closed account.

As you can see credit scoring is complicated but using different strategies to improve credit scores and knowing what’s in your credit files will help you stay on top of the game.

Make sure if an older charge-off is removed, you can counteract the possible negative effect on your scores if there are current positive trade-lines reporting. Rebuilding credit involves working with negative as well as positive items.

If you have no positive trade-lines reporting, get some even if it is a secured account. Easy to qualify for credit cards can help in your rebuilding strategy.

In the end, deleting negative information is a positive step in the right direction no matter what short-term score impact there may be. A clean credit report with a slightly lower credit score is always better than a credit report with derogatory items.

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