Credit Repair

What Does a Charge Off Mean on Your Credit Report?

If you fall seriously behind on your credit card debts, either paying nothing or not meeting the minimum required payment each month, the credit company will eventually get fed up.

Once the company deems your account uncollectable, it will take it off its books and either send it to a collections agency or sell it to a debt buyer. It will be labeled a “charge off,” and the delinquent debt will become a black mark on your credit score.

What exactly does that mean, and how can you recover from it?

How and when do you get a charge off?

How long it takes for the credit company to declare your debt bad depends on the type of account you have and its repayment terms. The time period is usually somewhere between 90 and 180 days. Creditors will communicate that your account is past due by mail or phone before they declare it a charge off.

A charge off is called “final status,” which means no more activity can occur on that particular account. On your credit report, you should see “transferred to” or “sold to” and the name of the collections agency or debt buyer so that you can trace the history of the debt. Any payments you make after charge off should go to the collections agency or debt buyer, not the initial creditor.

Does a charge off mean the debt is forgiven?

Getting a charge off does not clear your debt; you still have a legal obligation to pay it. The collections agency or debt buyer will likely pursue you to pay up, and it’s best to work with them to figure out a payment plan if possible. How much they are willing to work with you depends on the particular agency’s policies.

“It never hurts to ask what they can do to help you,” said Rod Griffin, director of consumer education and awareness at Experian. “I would recommend you get their agreement in writing, as with any kind of contract.”

Once you’ve paid the debt to the collections agency, the debt’s status will be updated to “paid.” But that doesn’t mean it won’t continue to negatively impact your credit score.

How do charge offs affect your credit score?

The lender, collections agency or debt buyer will probably report the charge-off status of your account to one or more of the nationwide credit bureaus. The bureaus that they report to will update your credit report with this information.

Once it’s been reported, your credit report will then reflect both the charge off itself and the missed payments that preceded it. Both of these will affect your credit score negatively.

“A charge off is a very negative entry in a credit report,” said Griffin. “Typically it follows a long string of delinquencies, so your scores are probably suffering already.”

How long does a charge off stay on your credit report?

Your credit score will reflect the nonpayment of the account and its charged-off status for up to seven years from the date of the first payment you missed. Repairing your credit is likely to require some patience.

If you pay off the debt during the seven years it remains on your report, its negative impact on your score may be mitigated. But paying it off doesn’t hasten its removal from your report. Paid or not, that charge off will stay on your report for seven years.

What can you do to remove a charge off from your credit report?

One way to try to remove the charge off from your credit report is to negotiate a “pay for delete” arrangement with the collections agency. This requires you to pay the entire debt or some substantial portion in one lump sum. In exchange, the creditor marks your account “paid in full” and deletes all related negative information from your credit reports. This is a good option for those who haven’t paid due to a logistical glitch, like mail not being forwarded to a new address, instead of an inability to pay.

There are instances when your report will reflect a charge off that you aren’t sure is valid or accurate. If you find a questionable charge off, contact the credit bureaus so they can investigate the situation. If the investigation finds a problem, the charge off may be removed from your credit report, or at least be changed to a status that doesn’t damage your credit score as badly.

“Remember, charged-off debts often are sold multiple times to various debt collection agencies who may not keep the best records,” said Logan Allec, a CPA who owns the personal finance site Money Done Right. “This means that the information surrounding your charge off on your credit report may not be able to be verified, so filing a dispute as described above may give you a shot at getting your charge off removed from your credit report.”

The bottom line

Failure to pay off your debts can have serious consequences. A damaged credit score can stick with you for years, and there’s little that’s more detrimental to that precious number than an official record of non-payment of your debts.

If you feel you will have trouble paying an account, contact your lender as soon as possible. They may be able to adjust your interest rate or work with you on a repayment plan so you can do everything possible to pay on time and stay in good standing.

 

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