If you’re trying to understand how credit works, you might have come across the term “charge-off.” A charge-off is an important concept to understand because it can significantly impact your credit score and financial health.
In this blog, we explain a charge-off, how it happens, and what it means for your credit.
What is a Charge-Off?
A charge-off is a term used in the credit industry to describe an account declared uncollectible by a lender. This usually happens when a borrower fails to pay a debt for a certain period, typically six months or more. When a lender charges off an account, they essentially write off the outstanding balance as a loss and report it to the major credit bureaus.
This significantly negatively impacts the borrower’s credit scores, as it remains on their credit report for up to seven years and can make it more difficult to obtain credit in the future.
How a Charge-Off Works
The process of a charge-off typically involves the lender first reporting the account as delinquent to the major credit bureaus. Then, after several missed payments, the lender may write off the debt as uncollectible and report it as a loss. The lender may then sell the debt to a collection agency that can attempt to collect the outstanding balance from the borrower.
Reasons for a Charge-Off
There are several reasons why a charge-off can occur. Understanding these reasons is important, as it can help you avoid this situation.
These actions can result in a charge-off:
- Not making payments on a debt for a certain period of time, usually six months or more.
- Losing a job or experiencing financial hardship makes it difficult to keep up with payments.
- Disputing the debt or questioning its validity can result in a charge-off if the lender determines the debt to be uncollectible.
- Filing for bankruptcy or having a debt discharged in bankruptcy.
- Ignoring collection attempts or failing to respond to a lawsuit filed by the lender.
Is a Charge-Off Worse than a Collection?
While a collection and a charge-off are bad for your credit report, many agree a charge-off can be worse. This thought is because there is more room for negotiations with collections.
Additionally, when you have an agreement with a collection agency, they may be willing to remove the collection status of your account from your credit report.
Removing the status from a credit report is usually much more difficult with a charge-off. However, paying down your charge-off amounts as quickly as possible can help, along with requesting a pay-for-delete agreement from the lender.
What Does a Charge-Off Mean on Your Credit Report?
A lender may charge off the account after 180 days with no scheduled payments. They can submit this decision to the major credit bureaus, who will note it on your credit report.
Even though the account is charged off, the outstanding balance can still appear on your credit report along with a “charge-off” status. Once this reflects on your credit report, it can remain there for seven years.
Should you decide to settle the account, it’s important to note that this does not remove the status from your credit report. Once settled, the account status changes to “charge-off settled.”
Other financial institutions can still see the negative mark when they request your credit report.
How Does a Charge-Off Affect Your Credit Scores?
The charge-off itself won’t have a significant impact on your credit scores. Rather, the effects that caused the charge-off to occur in the first place cause a drop in your credit score.
Every time you make a payment on your accounts, it is reported to credit bureaus. An on-time payment every month reflects positively on your credit score.
A charge-off means you’ve failed to make the minimum payment on your account or were delinquent for six months. These missed payments are reflected on the payment history section of your credit report and cause a dip in your credit score.
While paying your charge-off accounts won’t positively affect your credit score, the negative impact can ease over time, and your credit score can slowly recover.
How to Dispute a Charge-Off
To dispute a charge-off on your credit report, you can send a written dispute to the major credit bureaus along with supporting documents. Once the credit bureaus receive your dispute, theyl investigate the information and inform you of their findings.
They can update your credit report if the information is inaccurate or incomplete. Therefore, monitoring your credit report regularly is important to ensure all information is correct and up-to-date.
Don’t Ignore a Charge-Off
Ignoring a charge-off on your credit report can have serious negative consequences on your credit score and financial future. Additionally, ignoring a charge-off can result in legal action by the creditor, including wage garnishment or a lawsuit.
It’s important to address a charge-off as soon as possible, whether by negotiating a payment plan with the lender or disputing it with the major credit bureaus. By taking action, you can prevent further damage to your credit and financial stability.
If you have a charge-off on your credit report, it’s important to take action to resolve the issue and minimize its impact on your credit.To stay on top of your credit, sign up for a credit monitoring service.
MyScoreIQ is a top-rated credit monitoring service that provides FICO® Scores and alerts you to changes to your credit report as well as possible suspicious activity.