What Does a Charge Off Mean On Your Credit Report?

If you have a "charged off" account on your credit report, this means that your creditor (the lender) has decided that your account is unlikely to be paid. A charged-off account is usually a credit card account, but not always.

There's usually confusion about this because it sounds like you no longer have to worry about the debt. But that's not the case. You still need to pay attention to this and pay it off when you can. Let's take a look at some essential things you need to know about charged-off accounts.

When Does an Account Get Charged Off?

An account isn't charged off until you're really delinquent, such as over 180 days. This is usually the cutoff for credit cards, but an installment loan could have a shorter time frame. Sometimes, these loans are charged off after the payment is only 120 days delinquent.

Technically, when your account is charged off, your account has been closed. The creditor has decided that they want to remove the amount from their books because they don't believe it will ever be paid. So essentially, this declares that it's a loss for the company involved.

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Does This Mean the Debt Goes Away?

Unfortunately, your debt is still owed. Yes, it's a bit confusing. The creditor has decided that you'll never pay the debt, but they can still take steps that will make your life unpleasant. In most cases, the charge off will be reported to the credit bureaus. It will stay on your reports for seven years starting from the charge-off date.

It's also possible that the creditor could sell your account to a debt collector. This could lead to a variety of unpleasantness ranging from phone calls to being sued for nonpayment. Now, you can't be sued if the statute of limitations has passed. This differs by state, so if you are sued by a collector, take steps as soon as possible to contact an attorney and get legal advice. There are a lot of rules and an attorney can best advise you how to proceed.

One way to avoid being sued or even to avoid phone calls is to pay the debt. This won't remove it from your credit reports, but if you pay it, it looks better on your credit report. At that point, your report will show that the debt is "charged-off paid" and this shows you were responsible and paid it off.

How It Differs from a Collection Account

It's been pointed out that your account could be charged off and then sold to a collection agency. If so, you might see two lines on your credit report about this. Review it carefully to make sure it's worded properly. It should show that your account was sold to a collection agency, so whomever reviews your credit report will know that these notations are referring to just the one account and not two.

The collection account also stays on your report for seven years. The starting date is the original delinquency date that was reported to the agency by your creditor. But the good news is that the impact on your credit score decreases after the first two years. Each year after that, your score will improve as long as you use credit responsibly.

How to Prevent It

Sometimes, we have credit problems due to a negative life event. For example, perhaps you suffered a major illness or lost your job. But if you missed your payments because you were unorganized or weren't paying attention, then you can take steps to ensure this doesn't happen again.

Set up automatic payments and reminders so you don't forget to pay your bills. And if you don't have an emergency fund, start building one today. Even if you can only add a small amount to your fund each week, it will add up over time. Having an emergency fund will give you peace of mind and help you survive a crisis.

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