What is a Charge-Off?

woman working on laptop

A charge-off is a negative mark on your credit report that occurs when a debt has been left unpaid and the creditor determines the money to be uncollectible.

Charge-offs can be filed within 90 days of a late payment, though most creditors wait up to 180 days after a late payment. However, if your debt has been listed as a charge-off, this does not imply you are no longer responsible for the debt.

After being listed as a charge-off, debt can be sold by a creditor to a third-party collection agency. This will make it more difficult for you to resolve the charge-off and remove it from your credit report.

Why is my debt being charged off?

Creditors determine these unpaid debts to be uncollectible so they can remove them from their accounting books and write them off in their taxes. Although the debt is considered a loss for the credit company, they can still expect to recover their expenses through tax.

How does a charge-off affect a credit score?

Charge-offs can remain on your credit report as long as seven years from the date the account was listed as uncollectible. If you have even one charge-off on your credit report, creditors will view you as a high-risk loaner. You will likely be denied any new loans with a charge-off on your credit report.

A charge-off can be removed before the seven-year mark, but allowing it to remain on your credit report for any duration can be seriously damaging to your credit score.

How long does a paid charge-off affect my credit score?

Even a paid charge-off will remain on your credit report for seven years. Though paying a charge-off sounds like a simple solution, it does not change how long the charge-off will be visible on your credit history.

Should I pay charge-off accounts?

Paying a charge-off may improve your credit score slightly and will lessen the impact of the item over time, though it will still appear as a negative influence on your credit report. This can hurt your chances for credit approval when applying for new credit cards, loans or competitive interest rates.

Before paying a charge-off, consider the implications of your decision to pay. The charge-off’s age and other factors may make a difference in whether you should pay it or leave it unpaid.

When should I pay a charge-off?

There are several scenarios that may make paying a charge-off the best option. Consider paying a charge-off when:

  • The creditor will delete or re-age it. Some creditors may agree to delete a charge-off from your report if you make the full payment. It is also possible to re-age the account, which may make it appear as though you settled the debt in a more timely fashion.
  • You need to pay the charge-off to qualify for a home loan. The mortgage industry often requires that all outstanding debts be settled before approval for a loan. Ask the home loan lender if a partial payment is enough to satisfy their loan requirements.
  • The charge-off is recent. If the charge-off is new, it can be easier to have the account removed from your credit report entirely if the debt has not been sold to a third-party collector. A new charge-off will likely trigger a significant drop in your credit score and will be even more drastic the higher your original score was.

charge-off removes points from credit score

When should I leave a charge-off unpaid?

In some cases, collection agencies may try to fool you into paying old charge-offs. If the debt is close to being “time-barred,” or past its expiration date of collection, collectors will no longer be able to sue you for collection. They may use a barrage of high-pressure tactics to get you to pay these debts before they are unable to collect.

Collections agencies may also increase their pressure on you to pay the charge-off if the debt is nearing its reporting limit. Debt collectors will try to collect on accounts that are about to fall off your credit report because they will lose leverage once the debt is past its reporting time.

In these situations, it may be more advantageous to leave a charge-off unpaid until you’ve spoken with a professional about how to handle old charge-offs.

Additionally, you should consider leaving a charge-off unpaid when:

  • The charge-off is listed for more than one company. If your debt has been sold to a third-party collections agency, it will be listed on your report multiple times. After debt has been sold by the original creditor, it may change hands many times to multiple third-party collection agencies. Confirm which agency actually owns the debt to ensure you don’t pay someone who no longer owns the debt.
  • You aren’t sure the amount listed on the charge-off is correct. Some third-party debt collectors may add on fees and interest to your charge-off amount. Unless the agreement you signed with your original creditor allows for these third-party fees, you do not legally owe the additional money. A credit repair specialist can help you verify the amount listed and confirm it is correct.
  • The charge-off is past the statute of limitations. Though collection laws vary by state, charge-offs have a statute of limitations which can act as a defense against having judgement brought against you for non-payment of a debt. However, if your debt passes the statute of limitations for payment, you must appear in court to defend against any lawsuits filed by collection agencies.

How can I remove a charge-off from my credit report?

There are several ways a charge-off can be removed from your credit report. If the charge-off is inaccurate or unverifiable, these negative listings can be removed just like any other debt. Additionally, the credit reporting limit requires that charge-offs be removed from your account after the seven year period.

Before attempting to have a charge-off removed from your report, speak with the original creditor of the loan. Avoid negotiation with third-party collectors as they have no authority over what the original creditor reports to the credit bureau in regards to your charge-off.

Ask a credit repair specialist about these removal methods for your charge-off:

  • Pay for delete letter. You may be allowed to make the full payment for the debt in exchange for removal of the charge-off from your credit report. If a creditor has not already sold your debt, they may be willing to negotiate this. If the creditor is open to this option, be sure to have all correspondence in writing in case it is needed for future evidence of the negotiation.
  • Use the advanced method to dispute. If you are unable to pay the balance in full or the creditor will not agree to remove the account, you can dispute the account directly with the credit bureau. To do this, it is important to verify every detail of the charge-off entry to be sure that everything is accurate. If you find any errors, write a letter to each of the credit bureaus stating that your credit report contains mistakes that need to be corrected or removed. The credit bureau will contact the original creditor who must then verify the account is correct. If they cannot or will not, the charge-off must be removed.

When using the advanced method to dispute a charge-off, look for details in this information:

credit report charge off dispute

When attempting to remove a charge-off from your account, it is important to frame your requests to creditors carefully. Speak politely and avoid placing blame on any party. Many creditors and credit bureaus may dismiss your requests if they deem them to be unimportant or invalid. It may be more effective to use the help of a professional credit repair specialist or attorney when disputing charge-offs.

How to prevent charge-offs

Charge-offs are very damaging for your credit report and affect your ability to apply for new loans, credit cards and interest rates. Luckily, they are easily preventable.

Prevent charge-offs from being listed on your credit report with these tips:

  1. Pay your bills on time. It is important to make your monthly payments on time. Even one late or missed payment can trigger a charge-off. If you find yourself unable to pay on time or in full, speak with your creditor before the deadline. They may be able to make arrangements for you and will be appreciative of your notice before you are late. If possible, avoid going over 60 days past due on any bill.
  2. Don’t ignore “Final Notice” bills. Creditors will send you a bill stamped with a “final notice” warning when you are nearing the limit for your late payment. Contact your creditor if you receive one of these bills. It is important to come to an agreement with your creditor before the debt is sold to a collection agency.
  3. Create a monthly spending plan. Managing your finances is key to avoiding a late payment or going over budget. Monitor your credit accounts carefully and track your spending to be sure you are using your money wisely. Plan your finances around any debt you may have to pay back what you owe in the least amount of time possible.
  4. Monitor your credit report. You may not be notified of a charge-off on your credit report. Check your report and credit scores often to be sure all information is correct and look closely for any missing payments or charge-offs.

Finally, consider asking for professional help. Credit repair specialists can assist you with many aspects of your credit report. If you are experiencing problems with a charge-off or questionable account on your credit file, a professional may be able to help you navigate the process of disputing errors and improve your credit score.