What Is a Charge-Off?

What Is a Charge-Off?

A charge-off simply means a creditor has given up on collecting an unpaid balance and it’s written off the debt as a loss. Creditors typically charge off accounts after you’ve missed six scheduled payments, but it could happen before then.

Keep in mind, your creditors report your account activity to the credit reporting agencies. Here’s how a delinquency and subsequent charge-off may appear on your credit report:

• When an account is delinquent: After you’ve missed a payment, your account is no longer considered in good standing, but instead may be labeled as “potentially negative” or similar. Its entry will indicate the outstanding balance on the account and how long it has gone unpaid in 30-day increments up to 180 days.
• When a charge-off occurs: If the account is still delinquent after a certain period, usually 120 to 180 days, your creditor may decide to charge it off as a loss. Its status and the outstanding balance will still appear on your credit report but it will be noted as a “charge-off.”

Do Charge-Offs Affect Your Credit Score?

A charge-off, by itself, may not hurt your credit scores much. However, the missed payments and negative credit report entries that precede the charge-off could significantly harm your credit. Here’s how late payments could damage your credit:

• Missed payments hurt your credit score. Your payment history is the most important factor in your credit score, accounting for 35% of your FICO Score, the score used by 90% of top lenders. As such, late or missing payments hurt your credit scores more than any other single factor, and your scores suffer more every month a bill remains unpaid.
• The first missed or late payment may sting the most. A payment that’s 30 days late may hurt your scores the most, and the damage gets worse each month the bill remains unpaid. So, while yes, a charge-off will lower your credit score, it usually happens only after four to six months of missed payments and consequential credit score reductions. By then, your score might already be in bad shape.
• Your credit could be damaged for seven years. Missed payments, charge-offs and collections remain on your credit report for seven years. Their mention on your credit reports and their effect on your credit scores could impact your ability to get new credit in the future, though their effect diminishes over time.

Charge-Offs vs. Collections

With a charge-off, your creditor essentially gives up trying to collect and writes the amount off as an unpaid balance. However, you’re still responsible for repaying, the debt and your creditor may sell the charge-off to a collection agency.

If the collection agency reports the account to the credit bureaus, two changes will appear on your credit report:

• The balance owed on the charged-off account will change to zero.
• A new collection account will appear on your report.

The collection entry—yet another derogatory item in your credit file that could lower your credit score—will include contact information for the collection agency.

You’ll probably know about these changes long before you see a credit report because you will likely be bombarded with letters and phone calls. Collection agencies are notoriously aggressive and relentless in pursuit of their money—and the debt you once owed to your creditor is now owed to the agency. Any effort to settle the debt will have to be arranged through them.

Should You Pay Charged-Off Accounts?

The outstanding balance on a charge-off account is still your debt, and you are legally responsible to repay it—either to the original creditor or the agency that buys the debt.

As long as the account entry is designated as a charge-off and displays an outstanding balance, you can contact the creditor to make payment. Doing so will change the account designation to note the charge-off as paid. Paid charge-offs are still considered derogatory entries on your credit report, but some lenders view them as less negative than unpaid charge-offs.

Whether repaying a charged-off account helps you obtain credit in the future depends on the lender or creditor. Some lenders may view charge-offs and collections as a red flag and consequently consider you a high credit risk and decline your credit application. Still, some lenders view paid charge-offs more favorably than unpaid accounts, which may help your approval odds.

Can You Remove a Charge-Off From Your Credit Report?

If the charge-off on your credit report is accurate, it will be removed from your credit report after seven years. If you pay the charged-off amount, the charge-off will be noted as paid and removed after seven years.

However, if you believe the charge-off on your credit report is inaccurate, you have the right to file a dispute with the credit bureaus at no cost. The credit reporting agencies will investigate your claim and if the charge-off is erroneous, they may correct it or remove it from your report.

Frequently Asked Questions

• What Happens When a Credit Card Is Charged Off?

  A credit card charge-off is when your credit card company writes off your unpaid account as a loss. Generally, card issuers report charge-offs once they’ve gone without payment for six months, but it could happen earlier.

  Even though your card issuer “writes off” the account, you’re still responsible for paying the debt. Whether you repay the amount or not, the missed payments and the charge-off will appear on your credit reports for seven years and likely cause severe credit score damage.

• Do Charge-Offs Go Away After Seven Years?

  Yes, charge-offs should be removed from your credit reports after seven years. However, the negative impact on your credit score may gradually decrease over this period. After seven years, the mark should automatically fall off your credit reports, but it’s still a good idea to confirm it’s actually gone.

• Should I Pay a Charge-Off in Full or Settle?

  It’s best to pay a charge-off in full rather than settle an account. Remember, settling an account is considered negative because you’re paying less than you owe. Consequently, settling an account is likely to harm your credit scores. Still, it’s even worse to leave a debt entirely unpaid. Many lenders insist you repay or settle all outstanding debts before approving you for new credit.

Rebuild Your Credit After a Charge-Off

Missing payments, charge-offs and collections can seriously harm your credit score, impacting your ability to secure new credit in the future. It’s wise to rebuild your credit to help you achieve financial goals, like qualifying for a mortgage on a new home. Here are some proven tips to rebuild your credit:

• Monitor your credit. It’s good practice to regularly check your credit reports and look for areas of improvement. For instance, you may find you have high levels of debt you could pay down or an unpaid collection account you could repay. You might also spot inaccurate information on your credit reports. In that case, you have the right to file a dispute with the appropriate credit bureaus.
• Pay your bills on time. Your payment history impacts your credit score the greatest, so paying your bills on time is essential.
• Lower your debt balances. Your credit utilization ratio—the amount of available credit you’re using—accounts for 30% of your FICO Score. Aim to keep your debt ratio below 30%, but the lower, the better. High credit score achievers typically have credit utilization ratios lower than 10%.
• Consider getting a secured credit card. Using a secured credit card responsibly may help you improve your credit. As the name suggests, these cards require a security deposit, which lowers the card issuer’s risk. Generally, the security deposit doubles as your credit limit.
• Get help managing your debt. If you’re having trouble managing your debt, you might consider working with a credit counselor to create a workable budget and pay off debt.

Remember that rebuilding your credit takes time, so patience is key. Take comfort that by following these and other credit-improving tips, your credit will gradually improve over time.