What Is a Charge-Off?
Key takeaways
- A charge-off is a debt that the lender has written off as being unable to collect
- Charge-offs have a negative impact on your credit score and can remain on your credit report for up to 7 years
- Even if your debt has been charged off, you’re still legally responsible for paying it off
A charge-off is a negative item that appears on your credit report when a lender gives up on trying to collect an unpaid debt and declares it a loss. Charge-offs don’t occur if you’ve missed a payment or two — they generally happen between 120 and 180 days of account delinquency.
A charge-off adversely affects your credit score, stays on your credit report for up to seven years and is a red flag to future lenders. You should also know that even if your account is charged off, that doesn’t mean the debt is forgiven.
What happens when a credit card is charged off?
A charge-off doesn’t mean that you no longer owe the debt — rather, it notes that the lender has closed your account and is writing it off as a loss. The account will be marked as “charged-off” on your credit report and the lender or collector will no longer try to collect the money. However, the lender may sell the debt to a debt buyer or transfer it to a collection agency — in which case you’ll now owe them instead of the original lender.
Many states have a statute of limitations — usually three to six years after you’d missed a payment or made your most recent payment — that prevents the lender from using legal action to collect an old debt. In fact, it’s a violation of the Fair Debt Collection Practices Act (FDCPA) for the lender to take you to court over a charged-off debt if it’s past the statute of limitations.
The FDCPA also offers other protections, like not allowing collectors to use abusive or deceptive practices when collecting a debt. This includes making repetitive, harassing phone calls, threatening violence or using profane language.
Should I pay off charged-off accounts?
Yes, you should pay off your charged-off accounts, as you’re still legally responsible for them until they’re settled in full, paid off or discharged in a bankruptcy. If the debt was sold or transferred to a collection agency or debt buyer, you may end up making payments directly to the new owner of the debt, instead of the original lender.
That said, if you’re working to pay off existing credit cards or other debt, a charged-off account should be a lower priority since the blemish is already on your credit report.
Does a charge-off affect your credit score?
Yes, a charge-off appears as a derogatory mark on your credit report and negatively impacts your credit score. And if your debt’s transferred to a third-party collector, you’ll likely receive a second derogatory mark for your account being in collections — damaging your score even more.
That said, during the months leading up to the charge off, you likely missed several payments, paid late or wasn’t able to pay at least the minimum amount due each month. Because your payment history is the most important factor determining your credit score (making up 35%), your credit score already took a big hit. But while late payments stay on your credit report for seven years, the negative impact will lessen over time.
How to handle a charged-off account
If a charge-off appears on your credit report, there’s no need to panic, but you do need to take immediate action. While it’s inconvenient to handle, and requires paying, it’s possible to fix this all by yourself. Even if you believe that it’s an error, getting to the bottom of the issue is important especially if you are planning on taking out an auto loan or mortgage because potential lenders review your credit report as part of the application process.
Determine if the charge-off is yours or not
If you’re certain that the charge-off isn’t yours, you may be right. Consumer Reports found that nearly one-third of the 6,000 volunteers who helped with the research found an error on their credit report. This is generally due to human error and may occur as the person entering the data transposes a number in a Social Security number or address, thereby assigning the account to you by accident.
The other reason you might find an unrecognizable account on your credit report is identity theft. In this situation, you need to report it to the Federal Trade Commission. In addition, contact the three credit bureaus (Experian, Equifax and TransUnion) to put a freeze on your credit report, and call your banks and credit card issuers to report this to their fraud departments.
How to remove charge-off from credit report
If a debt is legitimate, it isn’t possible to remove it from your credit report unless it’s mistakenly reported or you negotiate its removal as part of settling the debt with the lender.
If the charge-off is attributed to a debt that you had but paid in full, you can file a dispute with the credit bureau. You’ll need to provide your contact information, the mistakes and an explanation of why you’re disputing them. Request that the information be removed and include a copy of the credit report with the errors marked and any other supporting documents to validate your request.
How to remove charge-offs by negotiating with creditor
If the original creditor still owns the debt — meaning they haven’t sold it to a debt collector — you may be able to negotiate with them.
Lenders may agree to remove the charge-off from your credit report if you pay the bill in full within a certain amount of time. Generally, they won’t offer this arrangement on their own; you’ll need to ask them if they will work with you and position it as a win for them since it’s money they didn’t expect to see.
Even if they won’t remove the charge-off from your credit report, once you’ve paid it and they report it as such, your credit report will show that it’s a “paid charge-off.”
How to avoid a charge-off
If your debt is delinquent, there are some things you can do to avoid getting to the point where it gets charged-off:
Don’t take an “out of sight, out of mind” approach to your finances.
You may be surprised that some lenders will work with you to create a new plan that ensures they get paid, even if it takes longer than originally expected.
If you have several bad debts, a debt consolidation loan can give you the most traction when it comes to repairing your credit.
Knowing where your money is going every month helps you meet your financial goals, and may help you find areas where you can cut back — thereby giving you more money to put towards your debt.
Sales and mergers of banks and businesses mean that you may miss out on important information if your address isn’t correct.
What to do if a debt collector calls you
Many lenders sell their delinquent accounts to debt collectors, who then own the debt and can attempt to collect on it. They should be following the FDCPA and contacting you at appropriate times and in the right way to collect the debt.
Assuming the debt is legitimate, you can do the following:
- Pay off the debt if you have the cash on hand. This is ideal if you’re able to pay it off with little strain on your daily finances.
- Take out a debt consolidation loan to pay the debt off. This is a good option for larger debts — with the old debt paid off, the “timer” on the debt will start. (Remember, though, that you still have the debt, just in a different form.)
- Talk to a credit counselor. A credit counselor will take a deep dive into your financial situation and discuss with you the best method to handle your finances.
- Work with a debt settlement company. If you face several debts and want administrative assistance in the process, a debt settlement company may work as a last resort.
Understanding your rights as a consumer
It’s essential to understand your rights when it comes to debt collectors. While you may legitimately owe a debt, and they may have every right to collect it, there are federal laws that prohibit them from using unfair or abusive or deceptive tactics and statements.
Things they cannot do include:
- Threatening to have you arrested or do things that are legally prohibited
- Contacting your family or employer
- Implying that they’re an attorney
- Calling you at unreasonable hours
You can submit a complaint with the CFPB and the Federal Trade Commission if you believe that a debt collector is violating the law.
Charge-offs can stay on your credit report for up to seven years. Even if you pay it off, like a missed or late payment, it will stay for seven years. However, the impact on your credit score may lessen over time, especially if you take actions to improve your credit score.
Yes, a charge-off is worse than a collection. With a collection, the lender or debt collector is actively seeking repayment and although “in collections” status appears on your credit report, you can negotiate the payoff with the collector to avoid a charge-off. However if you ignore the calls and letters from the collections agency and they decide to charge the debt off, your credit report will be hit with another derogatory mark when “charge-off” is added and the debt in collections is changed to $0.