Why isn’t an account removed from my credit report after it is paid?
Your credit report includes both current and historical account information. Credit grantors want to make a lending decision based upon both historical and current payment behavior. Historical information is an indication of how you paid your bills in the past, and your current information reflects your behavior now. Credit scoring models are built using past and current behavior to predict future behavior.
A paid closed account provides information on how you have paid in the past. Certain types of accounts are considered closed when the balance reaches zero, such as an installments loan (auto or mortgage). The account has a fixed amount borrowed for a specific period of time. When it is paid, the balance becomes zero, the account is considered closed, and is no longer an active account. It is not removed from the credit report immediately and provides information on how you paid in the past. If this account is removed, there would be no historical information on which to base a decision.
Credit card accounts are either closed by the card issuer or by the consumer. The card issuer may close the account, because the account is severely past due and will no longer permit the consumer to charge anything else on it. This is usually when the account is charged-off as a bad debt and/or sent to collections. The consumer may decide to close the account, because they don’t have a use for it any longer or have a replacement.
I know you would prefer to have delinquent accounts (not paid on time) removed from your credit report. On the other hand, you would want the accounts with positive credit history to remain on your credit report. Therefore, it is only fair that all information that is accurate remain on your credit report,
Most negative information stays on your credit report for seven years from the date it went into default. The exception are bankruptcies which can stay 10 years. Closed accounts with no negative information normally remain on your credit report for ten years, but can remain indefinitely as there is no legal requirement to remove them.
The good news is that normally negative information remains just seven years, but the most harm is done in the first few years this information is on your credit report. You may have to wait until the data ages and you have built up your credit history with on time payments.
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.