For borrowers who have been struggling with debt and poor credit, this is what you need to know about a “charge-off” posted on your credit report. While the simplest way to get a charge-off removed from your credit report is to pay it, there are a few options for removing the charge-off without paying.
What is a Charge-Off?
Charge-offs are one of the worst financial events that can appear on your credit report. Charge-offs are posted when a creditor has given up hope that you will pay off the debt and instead has closed your account. The borrower is still responsible for paying the debt, though the debt holder may change hands during this process. While this will occur only after a creditor tries and fails to get you to pay the debt, this is a serious negative mark on your credit report. Your credit score and your future ability to borrow money will be severely hurt.
Key things to know:
- You still owe the debt.
- You might make your payments to a collection agency instead of your original creditor.
- Your credit score will fall.
What Does a Charge-Off Mean on Your Credit Report?
Charge-offs occur if the borrower fails to make any payments on the debt for six months or more. A single missed payment puts the debt into delinquency, where creditors can charge additional fees and penalties. After one month, the account will move to a “negative items” or “negative accounts” section that will indicate how long the balance has gone unpaid, up to 180 days.
After this period, a creditor can “charge-off” the debt, resulting in this term appearing on the borrower’s credit report alongside the outstanding balance. Regardless of if the debt is sold to a debt collection agency, the mark will remain on your credit report for seven years. It is not possible to remove unless the borrower can prove the entry isn’t accurate. Having a charge-off on your credit report will make it harder to receive a loan in the future and your credit score will go down.
A Charge-Off Does Not Mean Your Debt is Forgiven
When a creditor “charges off” your debt, that does not mean it is forgiven. You’re still legally obligated to pay the outstanding amount. As long as the debt appears on your credit report, borrowers can contact the creditor to make a payment. Eventually, the status of the entry will change to “paid charge-off” once the debt has been completely paid. While the listing will remain on your credit report for seven years, paid charge-offs are viewed more favorably by lenders.
What’s the Difference Between a Charge-Off and Collections?
A charge-off is just a written-off debt amount reported to credit bureaus. The borrower still pays back the original lender if they want to. Collections refer to when that charged-off debt is sold to a collection agency, which then takes on the job of getting the borrower to repay the amount owed. A new entry will appear on your credit report titled “collections” where you can view all the information on your loan. Once the debt is sent to collections, borrowers will no longer hear from or directly pay their original lender.
How to Determine if You Have Charge-Offs or Collections on Your Credit Report
The easiest way to see if you have charge-offs or collections on your credit report is to regularly monitor your credit report. You can view your official credit report once a year. To claim the free credit reports, visit annualcreditreport.com. Borrowers can also view free, unofficial versions of their credit reports through credit card issuers.
Borrowers will likely know ahead of time if they have either of these marks on their credit report due to letters and phone calls from a collection agency.
Beware of This “Credit Repair” Strategy
Some “credit repair” companies will advise borrowers to abuse the dispute process regarding their debt. They will instruct borrowers to send letters to credit agencies disputing the legitimacy of every negative item on their credit report ― charge-offs, collections, judgments, late payments, etc.
The Fair Credit Reporting Act (FCRA) lays out specific guidelines for disputes. By law, creditors have 30 days to verify the accuracy of disputed information or the bureau must remove it from your credit report. Sometimes this works in the borrower’s favor and the information is removed, even when it’s accurate. However, this strategy is not foolproof. Borrowers with a large number of negative marks on their report will be flagged, and creditors will likely be able to verify the information within that time frame. Creditors know of this technique and know how to combat it.
Even if an item is removed from your credit report, that doesn’t mean it’s gone forever. It will remain in your credit history. Creditors can report negative items up to seven years after the first delinquency, even if the mark had previously been removed. Another downside to this strategy is that by disputing all the items on your report, creditors could uncover additional negative marks not previously in their records. This could leave your credit report looking even worse than before.
Should You Pay Charged-Off Accounts?
The short answer here is yes, you should. A charged-off account is still your unpaid debt, and you are legally responsible to repay, whether to your original creditor or a debt collection agency.
If you want to receive a loan in the future, such as for a house or an auto loan, lenders will see a charged-off mark as a major red flag to your creditworthiness. However, paid charge-offs, while still visible on your credit report, will be viewed more favorably by future lenders. It will demonstrate that even if you ran into some trouble before, you are capable of paying off a loan.
How Long Does a Charge-Off Affect Your Credit Score?
The biggest knock against your credit score is when you accrue late or missed payments, and every one of those stays on your credit report for seven years. Every month a payment is missed, your score will go down. Considering a charge-off occurs after six months of past-due payments, your credit score will already be significantly damaged by that point. The additional negative mark will cause your credit score to decrease yet again, but it will also become a major red flag to anyone who views your credit report. For example, a credit card company will use the information to determine whether to approve a credit card application. The exact number of points your score will decrease depends on the scoring system the credit reporting agency uses, such as FICO Score or VantageScore.
Is a Charge-Off Worse Than a Collection?
For the most part, yes. This is mainly because you have less negotiating power to remove them from your credit report and are still obligated to pay back the debt.
How to Remove a Charge-Off
The best option borrowers have when it comes to a charge-off is to pay it off. While you can try to repay the full debt, borrowers should first try to negotiate a settlement with the creditor. As long as the holder of your debt hasn’t sold it or tried to sue you for repayment, this should always be your first course of action.
If the creditor has sued you for the debt or sells it to a debt collector, it gets a little more complicated. If a debt collection agency owns your debt now, borrowers will have to start paying them instead of the original creditor. Attempting to negotiate a settlement with this third party could be easier or practically impossible depending on the specific agency that owns the debt. Additionally, the charge-off will remain connected to the original creditor in this situation. Since they already sold the debt to another party, there isn’t any incentive for them to help you remove the mark from your credit report.
In short, the best course of action is to try and reach a settlement with the creditor, but be prepared to start repaying the entire debt if they won’t budge.
How to Remove Charge-Offs Without Paying
We get it; paying it off isn’t simple. If it were, you probably would have paid it already — or at least set up a payment plan — to solve the problem. But there are a few other options.
Try to Negotiate
Borrowers can ask the creditor to remove the charge-off (or simply to stop reporting it) in exchange for payment. This doesn’t have to be the full amount owed, but the more you can pay, the better your negotiating position. Creditors are a business first and foremost, so if you can make them a deal in their best interests, they may be inclined to accept your offer. Send them a pay-for-delete letter outlining how you’ll provide payment in exchange for removing the negative mark on your credit report. Ensure that you get any promises or agreements in writing to be legally binding.
Seek Help from a Credit Repair Agency
If you don’t want to deal with the creditor yourself, you can try a credit repair agency. These businesses try to help borrowers by contacting and disputing marks on your credit report for you. Some of the most well-known companies include Credit Saint, Lexington Law and CreditRepair. But hiring these companies is additional money out of your pocket that might be better spent repaying your debt. You can perform the same techniques these companies do for free, so it might be in your best interest to handle your own negotiations.
Still not totally clear on what to do if you see a charge-off on your credit report? Watch this for more tips:
Dispute the Charge-Off
If you aren’t sure the charge-off is legitimate, disputing it is relatively simple. If you believe the negative mark on your credit report is inaccurate or an unpaid charge-off is still present after the seven-year expiration date, contact one of the three major credit bureaus — Experian, Equifax, or TransUnion. Whichever way you contact them, inform the bureau you’re disputing an entry and provide documentation that proves your side of the story. If the information you provide is accurate, the bureau will correct their records and inform the other two major bureaus to update their records as well.
Pay Your Outstanding Debts First
Considering a charge-off has already done long-term damage to your credit report, prioritizing your current outstanding debts first makes sense (provided the charge-off is legitimate.) Paying charge-offs and collection accounts won’t benefit your credit score all that much. Preventing any current loan from facing the same fate should be dealt with first. Once you’ve addressed your open accounts, then it makes sense to deal with any charge-offs.
What if the Creditor Won’t Budge?
This situation is entirely possible and can certainly take the wind out of your sails. That said, you should still make an effort to repay the debt, as having a paid charge-off is much better than an unpaid one on your credit report. If the creditor won’t settle or remove it, however, it will remain on your report for seven years.
What if My Debt is Overwhelming?
For borrowers whose debt has gotten out of control, there are still options to get yourself back to financial stability:
- A goodwill letter: This is mostly for people whose debt is due to a temporary setback like a layoff or medical emergency. If you’ve had a good payment history in the past often a company will work with you to set up payment arrangements. Be sure to include your account number to simplify the process for your lender.
- Credit counseling: Free credit counseling through nonprofit agencies should be available near you. This can be a good starting point if you need help.
- A bankruptcy attorney: Bankruptcy is a serious decision, but it could help get you financially stable if you have overwhelming debt. But bankruptcy won’t discharge certain types of debt. For example, most Chapter 7 or Chapter 13 bankruptcy filings won’t eliminate student loan debt.
- Debt Management Plan: This method consolidates your debt into a more manageable monthly payment and lower interest rate.
- A personal loan: One larger personal loan can be used to consolidate several smaller loans, leaving you with one fixed-rate monthly payment. If you can qualify for one, this can be a good way to streamline your finances and improve your credit score.
- Set up a payment plan: Having a simple, manageable payment plan can be all you need to start chipping away at your debt.
The Bottom Line
Charge-offs are often the result of loan mismanagement. While they can leave a stain on your credit report and borrowing ability for years, borrowers have options to address this negative mark. Always try to negotiate with your creditor first to see if some form of repayment could remove the entry entirely. If that fails, paying back the debt is much better than pretending it doesn’t exist. However, if repayment seems overwhelming, consider the above options to get your financial situation back on track.
Yes, your account can be charged-off in this case if your payments haven’t met the monthly minimum and your account is delinquent. Your account can also be charged-off if you file for bankruptcy.
Charge-off and write-off mean the same thing. A write-off is typically the more popular term from an accounting perspective. The terms are explaining how a creditor has removed the anticipated income (if the debt had been paid) from their ledger and has documented the loss as “charged off to bad debt” or “written off to bad debt.”
The statute of limitations is the limited period of time creditors or debt collectors have to file a lawsuit to recover a debt. After that, the debt technically becomes uncollectible. The time frame varies by state, so you’ll need to investigate your state’s laws to know for sure.
You probably already have bad credit if you have an unpaid charge-off on your account. It could take up to seven years for your credit score to return to where it was before the charge-off account was noted. Borrowers should prioritize their current outstanding bills and credit card debt before dealing with any charge-offs they may have. Preventing current loans from becoming an additional charge-off on your account is essential. Don’t try to open new credit card accounts. Keep your existing accounts in good standing by making on-time payments. Keep your utilization under 30% of your total credit line every month and keep your total accounts to a minimum. Review your credit reports, look for negative information, and try to address the problems. These methods can help build credit and improve your credit score.
Collection agencies buy debts from the original creditor after they have given up hope that the account will be paid. Creditors usually sell delinquent accounts in bulk at a discounted price.
When your debt is sold to a third-party collection agency, you are still obligated to pay it back. The Fair Debt Collection Practices Act regulates how, when and where you can be contacted. While third-party debt collectors can contact you about the debt, they cannot do so in a harassing manner. They must inform you of “validation information” concerning the debt if they contact you. Collectors cannot threaten you, lie to you, or attempt to solicit additional fees from you. Borrowers may want to hire a lawyer if they don’t want to deal with the collectors directly. If you feel a collector has overstepped, borrowers can contact the Federal Trade Commission, the Consumer Financial Protection Bureau, or your state attorney general with the accusation. For more details on your rights, visit the Federal Trade Commission’s page regarding debt collection.