What is a Charge Off?

What is a Charge Off?

To put it simply, a charge-off is a debt that a creditor gives up trying to collect after you’ve missed payments for several months. These can be any balance from a mortgage, credit card, doctor payments, and any other debt that you have. This happens when the creditor determines the debt as a “loss” for the company and give it the official designation of being “charged-off”.

Not so fast, you’re not in the clear just yet. Even though the creditor has charged off your account and the creditor reported it as a loss doesn’t mean you’re not responsible for paying back your debts. The charge-off will remain on your credit for up to seven years from the date of your first missed payment. Learn how a charge-off can affect your credit, how to verify it, and how you can get it removed from your reports.

How Does a Charge-Off get on Your Credit Report?

It gets placed on your report the moment the creditor claims your account as a loss. These are a derogatory mark on your report and will be there seven years. If you’ve heard the term “write-off”, it’s the same thing as a charge-off. There are times they use either or so be sure to check for both. Sometimes you may see a transfer instead of the other two and that means a creditor sold your account to a third party or a different creditor to continue seeking your payment.

So, How Much Does a Charge-Off Affect Your Credit?

This situation gets a bit tricky because this turns into a multi-whammy of issues for your credit. You will be shown as delinquent on your payment and for each month you’ve missed a payment your credit gets hit. Your payment history is considered the most important piece of your credit history and often used to judge if you’re approved or not on loans, credit cards, and so on.

If the account is in collections it can also lower your score and not paying a collections agency will further damage your credit because they do report each month as a missed payment even though your debt wasn’t with them.

The best news anyone can have is that showing you have good credit habits and showing that you have consistently paid your bills can swing an approval in your favor. There are differences between situational and habitual bad credit and most lenders ignore situational.

Can You Remove a Charged-Off Account?

In order to remove a charged-off account from your record you need to take the first step, verify. You’ll need to verify all the information and pull your credit reports. The account may have been sold a few times so you need to make sure each sale is marked as a closed sale and has a zero balance. Verify the outstanding balance and if it’s more than you expect it to be, be honest, ask for the creditor to explain the charges. They should have a list or document explaining the charges. Finally, verify the charge-off date with the original account as it should match the date of your first missed payment.

If there is an error in your credit report or the charge-off doesn’t go away after seven years, file a dispute. If it is a legit mark on your credit report, there is really not a whole lot you can do with a charge-off aside from pay it.

How to Pay Charged-Off Accounts

There are three ways you can pay a charged-off account:

  • Pay the original lender in full.
  • Settle the debt.
  • Pay the collections agency.

The best option on the list of three is to pay the original lender in full. This is the best mark you can have on your credit report and is often seen by lenders as a “good faith” initiative. Teen Finance Tips suggests never settling your debt unless you have to. When you settle your debt you usually pay less than the original debt amount. It will appear on your credit report as “settled”. It is better to show an account as paid but showing a “settled” account may give negative feelings to a lender as it shows you don’t, or can’t, pay back your debts in full.