What is a Charge-Off?
A charge-off is a pretty big deal in the world of credit reporting. But to avoid a charge-off, or fix one — you must first understand what it is.
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We’re not going to sugarcoat it—one of the worst things that can happen to your credit health is having a charge-off on your record.
A charge-off occurs when you fail to make your payments on a credit account for multiple months in a row. Upon severe delinquency, the creditor loses hope in collecting payment and closes the account. The debt is then wrote-off and accounted for as a loss by the creditor in their books.
Charge-offs can happen to multiple types of accounts. This includes credit cards, revolving lines of credit, auto loans, personal loans, and even mortgages.
While having your account closed may hint at freedom from the debt, this is not at all the case. Having a charge-off has serious consequences. ⚠️
These consequences include a major impact on your credit rating and hindrance in your ability to borrow in the future. Also, with a charge-off, you risk potential legal battles and wage garnishments.
And to be quite honest, dealing with the aftermath of a charge-off are likely to make you a little stressed. That’s why it’s important for you to gain as much information as possible—right now—to make the best decision for your financial future.
- The Charge-Off Process Explained
- What Does a Charge-Off Mean?
- Charge-Offs and Credit Scores
- Collections vs. Charge-Offs
- Why Do Creditors "Charge-Off" Debt?
- Removing a Charge-Off
- Disputing an Erroneous Charge-Off
- Conclusion
How Does the Charge-Off Process Work? 💳
The first thing to know is that charge-offs in most cases will only happen after you are critically late on your payments. The time period in which you may be facing a charge-off depends on the type of account.
In the United States, federal regulations mandate the time periods that creditors must charge off accounts. For installment loans from the top lenders, this occurs after 120 days of nonpayment. Revolving credit accounts, like credit cards, are closed out after 180 days (6 months) of nonpayment.
You can also end up on the charge-off chopping block if you fail to meet the monthly minimum payment amounts. If you consistently pay below the required amount, this can put your account past due. To avoid charge-off, you must bring your account current.
In most cases, the creditor or lender will attempt to notify you if you are past due. These attempts usually come in the form of letters or electronic correspondence such as emails. And depending on the type of account and your lender, you may even receive phone calls. View this attempt to reach out to you as a friendly reminder or a firm warning.
If the creditor has no luck in their attempts to collect, the creditor then makes the decision to charge-off the debt. The creditor closes your account and sends negative remarks to one or more of the credit bureaus. You will then see this debt marked on your credit report as a charge-off.
Also, the creditor may decide to sell the debt to a third-party collection agency or debt buyer.
✅ Not sure what your credit report looks like? There are several ways you can get your credit report for free.
What Does a Charge-Off Mean on a Credit Report? 📝
Well, it’s a done deal. The creditor has given up hope of payment, closed your account, and notified the credit reporting agencies. This is not at all good for your credit report.
A charge-off is a derogatory remark on your credit file—a big black mark. And because collections and derogatory remarks are one of the large factors of credit score calculation, this hurts. There’s no other way around it—a charge-off hurts, bad.
What’s another painful part of the process? Charge-offs, rather paid or unpaid, remain on your credit report for 7 years after the original date of the first missed payment. Further, getting something removed from your credit report is no simple feat.
Once paid, the account reflects a zero balance but still shows on your credit report as “paid.” It is still better to pay the charge-off even if it does stay on your credit report.
After all, zero is a lower number than any other amount of debt you may owe.
What Does a Charge-Off Do to Your Credit Score? 📉
Considering the point to get to a charge-off entails missing multiple payments, your credit score has likely already taken a bit hit. Having multiple 30, 60, and 90+ days past due can tremendously harm your score.
Past due payments are reported on your credit report. Payment history is the largest factor to your credit score weighing in at a whopping 35%. This means payment history can absolutely make or break your score.
Therefore, having multiple late payments will mortally wound your credit score. FICO® research even reports a loss of up to 50 points for being 30 days past due. And an even more substantial loss of 100+ points for being 90 days past due.
Plus, these late payments stay on your credit report for, you guessed it, seven years.
But, having that big ole charge-off remark will harm your score even more than missed payments. To most lenders, the only thing worse than multiple late payments is a charged-off account. In the case of a charge-off, you have both missed payments and that black mark from a closed account.
This combination of missed payments and the charge-off lowers your score. A lower credit score can make it very difficult to borrow funds in the future. It will be much harder to get approved for a credit card or auto loan. And when you do get approved for loans, you’ll see an increased interest rate.
Homeownership is almost impossible with the combination of these negative factors. Plus, you’ll also see higher insurance rates and have to pay larger housing and utility deposits.
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The Major Difference Between Collections and Charge-Offs ⚖️
When the creditor writes off the debt, they often times sell it to a debt buyer or call in a third-party collection agency for help. When a creditor chooses to sell the debt, it puts the ball in the collection agency’s court. Collection agencies then take over the effort to recoup the debt.
Original creditors can also choose to hire collection agencies to help recover the debt before charge-off proceedings begin. It just depends on the creditor and the type of collections that they choose to call to duty.
Debt collectors are notoriously aggressive, persistent, and can be downright menacing. They are sharks you want to avoid in the sea of personal financial problems. It is likely that you will know when your debt is being sold to a collections agency as they will give you plenty of notice. 🦈
When a collection agency buys the debt, the charge-off still appears on your credit report. However, it now appears as a zeroed-out charge-off. Additionally, a new entry appears under the collections section of your credit report.
This further harms your credit score. Just think about it. Between the missed payments, the reporting of the closure, and now the reporting of a collection, major damage occurs. Yikes.
Credit reporting is a key difference in collections and charge-offs. And when you decide to pay your closed account, you will now make the payments to the collection agency and not the original creditor.
💡 Did you know: There are certain actions you can take to boost your credit score.
Why Do Creditors “Charge-Off” Debt?
It’s important to know that reporting a charge-off is an accounting move transacted on the creditor’s side. Deeming a debt uncollectable is strictly for business purposes to write-off that debt. ✍️
Even though the words “charge-off” may hint at freedom for the borrower, this is not at all the case. You as the borrower and still legally responsible for remitting payment of the full amount owed.
Additionally, the creditor is within their rights to pursue collection of the charge-off. If the collection agency route isn’t taken, your creditor could potentially sue you or request garnishment of your wages.
The only way to get out of the sinking charge-off boat is to either settle the debt, file for certain types of bankruptcy or wait until the statute of limitations is up.
Statute of Limitations
The statute of limitations is a set time limit on how long a creditor can take you to court for payment on a debt. Once the statute of limitations passes, the debt is now considered too old for collection through the court system. This means that the creditor can not sue the borrower for an unpaid charge-off.
In general, the state you reside in determines the statute of limitations. The statute of limitations also varies on the type of debt, though all consumer debts have limits on the number of years you can be sued for non-payment.
Borrowers can even countersue a company or agency for taking them to court on an old debt. But, if the borrower makes even one payment on an expired debt, the time limit for this debt is reset. This means the creditor at that point can pursue you for payment.
How to Remove a Charge-Off From Your Credit Report 🎯
Having to wait seven years for the charge-off to expire from your credit report is a bummer. Even if you pay the charge-off, the seven-year rule applies. And having to wait seven years to apply for any type of new credit is frustrating.
The sad fact is the only way you can get a legitimate charge-off removed is to convince the original creditor to remove it. They hold the power here. This negotiation process is honestly hit or miss. But, it is your best option if you want to move on with a life of being creditworthy.
To convince the original creditor to remove the charge-off from your credit report, you’ll want to offer immediate payment. If you can pay the charge-off in full—great. The more you can pay, the better of a chance you have at successfully convincing the creditor. If you can’t pay the full amount, pay as much as you can, as fast as you can.
When approaching the creditor, avoid pushing the blame on them. Also, avoid giving them a sappy story or an excuse. Just cut straight to the point and offer to pay in return for removal from your credit report.
If they agree to help you out, do your happy dance. And if you can obtain an agreement in writing to prove the agreement, even better.
In the unfortunate event, you can not get the creditor to agree to remove the charge-off, weigh your other options. However, it is always best to pay the charge-off even if it sits marked as “paid” on your credit report. Paid is always better than unpaid and will increase your chances of obtaining new credit when compared to an unpaid charge-off.
How to Dispute a Charge-Off Reported in Error
In the event you notice an inaccurate listing of a charge-off on your credit report, don’t panic! Clerical errors do happen.
If you notice any inaccuracy or even a debt you’ve never owed on your credit report, you can dispute this through the credit bureau that reflects the error. You’ll likely have to provide some documentation and proof of the error, but this is typically a streamlined process.
The credit bureau will then verify the reporting with the creditor. In case of genuine error, they will correct the entry and make the other national credit bureaus aware of the error as well.
The Bottom Line
Not to be dramatic, but having a charge-off is a severe hit to your financial health. It’s important to remember that a charge-off will only happen if you fall severely behind on your payments. And you’ll likely know it’s coming as your lender will reach out to you if you are late.
The charge-off process is a credit killer and it can be hard to recover quickly.
However, stuff happens in life. In the event you are going to be late, communicate with your lender. They may have other options for you such as payment management tools, programs, or counseling services.
But remember: the best way to have a charge-off removed is to avoid the charge-off in the first place. It’s important to always make your payments on time and for the amount due. Don’t ignore your debt as, sadly, it won’t go away on its own.
All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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