The mark of a “Charge off” on your credit report is not good news. Charge off means someone’s lost faith in you to pay back your debts.
A charge-off appears on your credit report when a creditor has written off your account as a loss on their receivables. It boils down to that a creditor has made multiple attempts to have you pay back your debts, and you haven’t.
This all means that your account has been charged off as bad debt.
When Does A Charge-off Appear On Your Credit Report?
When you’ve failed to make a payment, your creditor will note this mishap as a delinquency. Once a delinquency is reported, the account will move from the "Accounts in Good Standing" section of your credit report to "Negative Items" or "Negative Accounts."
The notation will indicate the balance you owe on the account and how long it has gone unpaid in 30-day increments up to 210 days. After anywhere between 90 and 210 days, your creditor can decide to charge off the account. At that point, the entry and the outstanding balance will remain on your credit report, but it will be noted as charged-off.
Are Charge-offs Bad?
Charged-off accounts are pretty bad, especially if you’re trying to keep your credit report squeaky clean.
A charge-off indicates that not only have you missed a payment, but you’ve failed to repay it for an unacceptable amount of time. After 30 days, an unpaid debt has already had its toll on your credit score, and every month after that, it’ll suffer more and more.
Missed payments leave a stain that’s going to be a lot harder to handle than that red wine spill of yours. If you’re late paying your bills by over 30 days, a creditor can report your missed payments to the three credit bureaus (Experian, Equifax, and TransUnion).
How Bad Though?
The most prominent factor of your credit report is your ability to make on-time payments. Your on-time payment record accounts for 35% of your credit score. A whopping 35% of your credit score can take a hit once a missed payment or charge-off appears on your credit report.
Once a charge-off appears, it can be challenging for any other creditor to trust you based on your credit history. Without the trust of creditors, your financial endeavors will be limited. Your credit score can determine whether or not you secure personal loans, mortgages, or auto loans that you’ll need in the future.
Not only will a charge-off have a significant impact on your credit score, but it will linger around for up to seven years. To make matters clear, if you just turned 20, you’ll struggle to make big financial moves up until you’re 27 years old.
How Long Do Charge-offs Stay On Credit Reports?
A charge-off affects your credit report for seven years. Although a creditor has given up on you, it doesn’t mean you're no longer responsible for paying the debt.
Once a creditor has charged off your account, it may sell your debt to a collection agency. This collection agency takes over efforts to collect the money you owe. If your account’s been passed over, the balance owed on the charged-off account will change to zero, and a new entry will appear in a section titled "Collections."
Charged-off accounts come from your original creditor, and if your debt’s been sold, debt collections come from collection agencies, meaning they leave two separate marks on your credit report that you’ll want to handle.
Should You Still Pay A Debt That’s Been Charged-off?
Just because your debt’s been charged-off that doesn’t mean it’s no longer your responsibility. The outstanding balance is still your debt, and you should still take care of it.
Creditors and lenders who see unpaid charge-offs or collections on your report aren’t likely to accept any credit applications you submit in the future. Although delinquency on your credit report will limit your chances, lenders are more likely to take a chance on people with paid accounts rather than unpaid ones.
Just because you’ve paid your debt, it doesn’t mean the account will be removed from your credit report or even improve your credit score, but it still puts you in a better position to take out a loan or line of credit.
Credit Wizard Tip: Keep reading to find out how you can leverage a debt payment so that it puts you in a better position.
Can You Remove Charge-offs From Your Credit Report?
Removing a charge-off from your credit report is pretty much impossible. Because your original creditor has moved on, your debt is now in the hands of a collection agency. Any negotiating you do from this point on will be with the agency.
There are two ways you can move forward once a charge-off appears on your credit report:
#1 Negotiate a Pay For Delete Agreement
If your account’s been passed over to a collection agency, you may want to consider a pay for delete agreement. When an agency buys your debt, it may pay only a fraction of what you owed on your original debt.
The way that a collection agency makes a profit is by getting you to pay off the debt. These circumstances allow you to leverage a payment in return for the agency removing the collection from your credit report.
You can go down the pay for delete route by contacting the collection agency that appears on your credit report or submitting a formal request letter, known as a pay for delete letter. When submitting a pay for delete letter, you’ll want to clearly state your offer to repay all or part of the debt in exchange for the collection agency removing the account from your credit report.
This process is never a sure bet as pay for deletion letters don’t carry any legal weight. A collection agency can take your payment and still refuse to remove the account from your credit report (a sneaky collection agency tactic).
Always request written confirmation from the collection agency that they are willing to go through with the deal and remove the account before sending any payments.
#3 Dispute After Seven Years
If you were wondering how to remove a charge off without paying, this is the closest you’re going to get.
According to the Fair Credit Reporting Act (FCRA), past-due accounts can only remain on your credit report for seven years from the first date of delinquency. Unjustly, a collection agency sometimes reports an old debt as new; this is known as re-aging a debt.
If your debts have been unjustly re-aged, you should dispute them and contact the Consumer Financial Protection Bureau.
When a debt is re-aged, it appears to the credit bureaus that your account became delinquent later than it did. Sneaky re-aging keeps a charge-off on your credit report for longer than you deserve. Gather any proof you have regarding the first date of delinquency to strengthen your dispute.
Note: Partially repaying your debt can resurrect the statute of limitations and alter when your seven years of credit report damage are up. Be sure that if you’re setting up a payment plan on your debt it results in a full and documented accord and satisfaction.
How To Move Forward
Hopefully, you’re able to repair your credit score with some strong negotiation skills, but if not, you’re going to have to wait some time before a charge-off is entirely in your past.
Just because a charge-off is on your credit report, that doesn’t mean you can’t work on repairing your credit in other ways.
Credit cards and loans may be off the table because of your current standing with the credit bureau, but you can always depend on a debit card. Extra is the first debit card that lets you safely build credit. Yes, there is a credit-building debit card (and it also offers rewards).
By using a debit card, you won’t create any more debt, meaning no more debt collectors will be after you. Extra doesn’t require a credit check, meaning you can start working on your credit score right away.
Although you had a slip-up in the past, it doesn’t mean all future credit opportunities are off-limits to you. Don’t let a mistake from your past hold you back as you work towards a better financial future.