A charge-off means a creditor has given up on collecting an unpaid balance and it’s written off the debt as a loss because it doesn’t believe you will repay, typically after six missed scheduled payments. Despite the charge-off, you’re still responsible for paying back the debt.
A charge-off is considered a derogatory entry in your credit file—a serious negative event—which can adversely affect your credit score and your ability to borrow additional funds.
Keep in mind, 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?
Your payment history is the most important factor in your credit score. As such, late or missed payments that precede the charge-off could significantly harm your credit. Here’s how late payments could damage your credit:
- The first missed or late payment may sting the most and the damage gets worse each month the bill remains unpaid.
- 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 score 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 and 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.
Paying 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.
If 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.
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.
For more information on understanding credit, see the following articles: