Got a Charge Off on Your Credit Report? What It Means and How to Remove It

For borrowers struggling with debt and poor credit, you might check your credit report and note that an account has been “charged off.” But what does that mean? Should you still pay it, and what are your options to try to protect your credit score? While the simplest way to get it removed is to pay the debt, there are a few ways to remove a charge off without paying.

10 Key Things to Know about Charge Offs

  • It’s a serious financial black mark
  • You are still responsible for paying a charged-off debt
  • You might make your payments to a collection agency instead of your original creditor
  • It will stay on your credit report for seven years
  • Many different types of debt can be charged off, including credit card debt, personal loans and student loans
  • You will continue to owe the debt until it is paid off, settled or is discharged by bankruptcy
  • Your credit score will fall whenever a debt is charged-off
  • You will probably have difficulty getting approved for new credit
  • You’ll pay higher interest rates in the future
  • Dealing with the charge off — either by repaying it in full or negotiating a settlement — will only improve your credit score

What Does Charge Off Mean?

Charge offs are one of the worst financial black marks that can appear on your credit report.

A charge off means that your creditor has decided that an unpaid debt is uncollectible. When that happens, it will be noted on your credit report as charged off. Charge-offs are posted when a creditor has given up hope that you will pay off the debt and instead has closed your account.

This usually happens after six months of past-due payments. The borrower is still responsible for paying the debt, though the debt holder may change during this process.

After six months, a creditor will “charge off” the debt, and this term will appear on your credit report alongside the outstanding balance.

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 future ability to borrow money will be severely hurt.

Pro tip: Note that 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 indicating how long the balance has gone unpaid, up to 180 days.

READ MORE: What happens when accounts are charged off?

How To Remove Charge Offs From Your Credit Report

There’s only one easy way to remove a charge off — prove it’s inaccurate or a mistake. There is no way to get a legitimate charge off removed from your credit report without at least a partial payment. However, it is possible to lessen the damage to your credit score.

You can attempt to negotiate the removal of the charge-off from your credit report as part of the settlement process, but you will be required to pay off part of the debt.

If you repay or settle the overdue debt, the charge-off notation will not be removed from your credit report. It will be noted as “settled.”

Pro tip: Whether or not the charge off is listed as “paid” or “settled” should have little to no impact on your credit score. The credit score damage comes from skipped payments. When the status changes to “paid” or “settled,” your credit score will rise because creditors will see that you’ve taken responsibility for the debt.

Though the charge-off will remain on your credit report for seven years, once it is noted as “paid” or “settled,” it will stop dragging down your credit score and will show potential employers or landlords that you’ve made an effort to fulfill your part of the loan contract.

Pro tip: Creditors are more likely to negotiate the removal of a charge-off if you can prove that your inability to pay was due to a temporary hardship, like a layoff. In this instance, it might help to send the lender a letter offering proof of a pattern of good payment history in the past.

READ MORE: Is debt settlement the fastest way to get out of debt?

Charge Offs Hurt Your Credit Score

The impact a charge off will have on your credit score will depend on the credit score you start with. If you’ve already gone six months without making a payment, chances are your score is already pretty low.

Payment history makes up 35% of your total credit score. Your credit score will fall gradually as each payment is missed, but the more positive the payment history you have built up, the bigger the impact will be on your credit score. Often it will lower a credit score anywhere between 50 to 150 points.

Pro tip: An unsettled charge off will be a major red flag for anyone viewing 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.

Despite what you may read elsewhere, dealing with the charge-off will only help your credit score. According to Credit Karma, here are the average credit score changes you should see depending on the approach you choose:

  • Paid in full: 25-point increase
  • Removed from credit report: 23-point increase
  • Settled for less: 21-point increase

READ MORE: How to build credit

Charge Offs Stay on Your Credit Report for Seven Years

An unpaid or unsettled charge off will stay on your credit report for seven years unless you negotiate its removal or the charge off is an error.

Borrowers will likely know whether there are charge offs in their credit history due to letters and phone calls from a lender, credit card company or a third-party collection agency.

The easiest way to know whether a loan has been charged off is to regularly monitor your credit report. You can view each of your official credit reports once a year at Borrowers can also view free, unofficial versions of their credit scores through credit card issuers.

Borrowers will likely have an idea of if they have either of these marks on their credit report due to letters and phone calls from a collection agency.

Since you probably don’t have enough money stashed away to repay the debt in full, debt settlement will be the best option to boost your credit score.

READ MORE: Debt settlement pros and cons

Pro tip: You don’t need to attempt this on your own. A third-party debt settlement company can help you negotiate with your credit score. Even though you will have to pay them for the service, the average customer sees their debt reduced by about 30% after fees, according to the American Association for Debt Resolution (AADR).

READ MORE: Best debt settlement companies

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.

Pro tip: Prioritize your current monthly payments. A charge off has already done long-term damage to your credit report, so paying all of your current bills first makes the most sense for your credit score (provided the charge off is legitimate). Paying charge offs and collection accounts won’t help your credit score as much as staying current on your other bills. Preventing any current loan from facing the same fate should be dealt with first. Once you’ve addressed your open accounts, deal with the charge offs.

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 for repaying it, 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. However, while still visible on your credit report, future lenders will favorably view paid charge-offs. It will demonstrate that even if you ran into some trouble before, you are willing to take responsibility for repaying your loan.

What if the Creditor Won’t Negotiate?

This is entirely possible and can take the wind out of your sails. That said, you should still try to repay the debt because having a paid charge-off is much better than an unpaid one on your credit report.

Watch Out For “Credit Repair” Claims

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 dispute guidelines. 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 reports 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.

READ MORE: 10 best credit repair companies

Is Your Debt 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 financially stabilize you 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.

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