If a borrower misses several months of payments, the creditor might give up on trying to collect the debt and write it off as a loss. When this happens, the account is designated as a charged-off account or simply a "charge-off."
Just because the creditor has charged off the account doesn't mean that you aren't still expected to pay back the debt, though. They might sell your debt to a third-party collections agency, which can also appear as an account in collections on your credit report.
Let's take a closer look at everything you need to know about charge-offs and what you can do to remove them from your credit report.
When you take out a loan or a line of credit, the creditor or lender is expecting that you will pay back the money that you owe based on the agreement you’ve made. However, if you are unable to keep up with your payments or completely stop paying toward your loan, it can mean your account becomes delinquent.
After a certain number of days, the creditor might choose to charge off your account. In many cases, the length of time after an account is delinquent before a creditor charges it off ranges between 120 and 180 days.
Charge-off is the term used when a creditor has closed your account to future changes and written it off as a loss.
When your account is charged-off, it means that the creditor has given up on collecting the debt from you and written it off as a loss. This doesn’t mean that you’re off the hook, though.
With your debt now in the debt collection agency's hands, the debt collector will try and get you to pay off the debt. They can send you letters, call you, email you, or text you in an attempt to collect the debt. They can even file a civil lawsuit against you in order to recoup the money that is owed.
When an account is charged off, it doesn't mean that you are no longer obligated to repay the debt.
Yes, charge-offs will appear on your account history along with other negative information, such as missed or late payments. Negative information typically stays on your credit report for seven years.
Not only will charge-offs show up on your credit report, but they can also be very damaging to your credit score.
Did you miss a payment and it showed up on your credit report? This article looks at what you can do to remove a 30-day late payment from your credit report.
You might assume that paying the debt you owe to a collector will automatically remove the mark from your credit report.
Unfortunately, this is not the case.
Negative marks such as collection accounts usually stay on your credit report for up to seven years. This is true even when you have paid them off. Paid charged-off accounts and collections accounts will still show up on your credit report rather than disappearing and will simply appear as 'paid' in their status.
What can you do when there is negative information on your credit report? This guide looks at four simple ways to remove derogatory marks on your credit.
There is a bit of good news on the collections account front, though-- the latest credit scoring models (VantageScore 3.0 and FICO 9) ignore paid collections accounts. If a creditor or lender uses one of these newer models to calculate your score and you pay off the collections account, it won't do nearly as much damage to your score as if you didn't pay the debt.
At this point, though, most creditors are still using the older FICO versions. Collections under $100 are ignored by FICO 8, but all collection accounts are considered in the version most commonly used by mortgage lenders.
If your charged-off account has been sent to collections, take a look at our guide to removing collections from your credit report.
If you’re planning on applying for a mortgage, car loan, or otherwise borrowing money in the near future, you might be motivated to clean up your credit report. Even if the negative account first went delinquent several years ago, this can still mean that it will stay on your report for a few more years.
Before we look at how to remove charge-offs from your credit report, you'll need to determine whether the information on your credit report is accurate or an error.
We'll take a look at the details of how to do this in the next section.
On the other hand, accurate negative information can be very difficult to remove from your credit report. Technically, creditors have an obligation to report accurate information to the credit bureaus, and they will sometimes be unwilling to cooperate when you ask to have negative information removed. That being said, there are some steps you can take that could help improve your credit files, which we'll discuss in the section entitled "Negotiating With the Creditor When a Charge-Off Is Accurate."
The first thing you'll want to do if you know that the charge-off on your credit report is an error is to gather all of the information you have about the debt.
Suppose you find that there is an inaccuracy in the information showing up on your report. In that case, you'll want to file a dispute with the credit bureau that is reporting the incorrect information.
You can file disputes online with all three major credit bureaus. In many cases, this is the fastest way to have the error in your credit report addressed and resolved.
You are allowed to initiate disputes with credit reporting agencies under Federal law when you believe the information is inaccurate. The credit bureaus will then have to look into your claim and either fix or remove any errors from your report.
After you've gathered all of the information about your debt, you might find that the information showing up on your report is, in fact, accurate.
If you find yourself in this situation, you can try and negotiate with the debt collector or the creditor. Basically, you can offer to pay off the debt in full or in part in exchange for having the charge-off account updated or removed from your report.
You do not necessarily have to pay the full balance in order for a debt collector or creditor to accept this deal. This is particularly true if the account has been delinquent for a substantial amount of time or it has been passed on to another entity, who likely bought it at a discount.
Striking this type of deal with a creditor or debt collector is known as pay-for-delete.
Basically, this means:
Important: Though pay for delete arrangements are technically legal, creditors are not obligated to agree to a pay for delete deal or remove charge-offs from your credit. If a creditor or debt collector agrees to a pay for delete agreement, make sure you receive written confirmation that they will remove the charge-off before making your payment.
Another way you can deal with negative information like charge-offs on your credit report is by hiring a legitimate credit repair company. It's important to understand that there are a lot of scammers out there in the credit repair industry.
Watch out for credit repair companies that are thinly veiled scams: You should be particularly skeptical of any debt relief or credit repair companies that promise results that appear too good to be true or ask for money upfront.
Hiring a legitimate and reputable credit repair company can help save you the time of dealing with credit bureaus, debt collectors, and creditors. However, in most cases, these companies aren't able to make any changes to your credit report that you don't have the power to make on your own. Additionally, there is almost always an additional fee when you use these services.
Are you worried that a past or upcoming eviction is going to have a negative impact on your credit file? Check out this post about how to get an eviction removed from your credit report.
In some cases, you might do everything you can to get a charge-off account removed from your credit report to no avail. This can be incredibly frustrating, particularly if you are relying on an impeccable credit file to help you secure a loan with the best rates and terms.
The good news is that the account will fall off your credit report eventually-- negative information typically stays on your credit report for seven years from the date of first delinquency. Once this happens, it won't have any impact on your credit score.
Is your credit score suffering because of too many hard inquiries? This guide goes over how to remove hard inquiries from your credit report.
That being said, you will still be legally obligated to pay the debt even once it falls off your credit report. It is possible, though, that the statute of limitations on the debt could eventually expire. The statute of limitations for each kind of debt is different from state to state, so you'll want to take a look at the laws in your state.
In the meantime, you can work on rebuilding your credit. As the charge-off accounts get older, they won't always have as much of an impact on your score. The fact that the overall impact of negative information lessens as it ages and a dedicated effort to rebuild a positive credit history can help you bring your score back up and make you appear a better borrower to lenders and creditors.
If you fell behind on your payments due to a hardship, you can send your creditor what is known as a "hardship letter." This is a letter that explains your circumstances and the action that you're asking the creditor to take to help you repay what you owe. If you incurred late payments during COVID, take a look at this post to learn how to remove them.
If you have a charge-off account on your credit report that you simply can't remove, don't despair.
You can work to rebuild a positive credit history by taking actions such as:
It can feel like a huge weight off your shoulders to pay off old debts and get on top of your personal financial and credit situation. At the same time, be very careful in how you deal with old debts. A number of things can reset the statute of limitations timeline on your debt-- such as promising over the phone to pay the money you owe.
Are you struggling to build credit because you don't have any credit history? You can learn more about how to establish credit from the ground up in this article.
Another way you can rebuild your credit is by using installment loans. You can learn more about installment loans and how they can improve your credit in my recent post on the topic. I've personally used this type of loan to improve my own credit score in the past.
Before I sign off, let's answer some of the most commonly asked questions about charge-offs.
If you're researching what to do about your charged-off account, you might also be bumping into the term "write-off." A write-off and a charge-off are the same things, and the two terms are used interchangeably.
When this happens, it can have a negative impact on your credit. However, it can also be moved or sold to a different creditor. Depending on the circumstances, the transferred account can be listed as a charge-off or in good standing.
In order for a creditor to decide that it's not worth trying to collect on your debt, you typically have to miss quite a few payments.
If the account is finally listed as a charge-off, though, your scores will likely further decrease.
Your credit can continue to take a beating if you don't pay the debt collector, as they can report missed payments to the credit reporting agencies.
On the bright side, even though derogatory marks typically don't fall off your reports for seven years, their negative effects usually diminish after two years, so long as you are able to show that you are using credit responsibly from now on.
Whether or not you should pay a charged-off account depends on a few different factors. You will want to verify the information before you make a decision, as it's possible that the charged-off account is an error that should be disputed with the credit bureau.
If you determine that the charge-off is accurate, you will typically want to pay it off. However, it's worth trying to negotiate a pay-for-delete agreement in the hopes that the mark will also be removed from your report. Making payments toward old debts can also re-start the clock on the statute of limitations for the debt as well, so you'll want to think about what makes the most sense in your situation.
You can pay charged-off accounts in three different ways:
If you realize that the charge-off is an error, don't pay it. Instead, file a dispute with the credit bureau that is reporting the erroneous charge-off.
Looking at your credit report and finding that there is a charge-off is a very unpleasant experience. Not only can it reduce your credit score, but potential lenders might offer you worse terms or deny your applications as a borrower when there is a charge-off on your credit report.
Resist the urge to ignore this problem when it happens to you-- there are steps you can take to try and remedy the situation.
Even if you are unable to remove the mark from your credit report, dealing with the debt can help ensure that it doesn't do further damage to your credit score. In the meantime, you can work to rebuild a positive credit history by making payments on time, keeping your credit utilization ratio low, limiting how often you apply for new credit, and using other credit building tactics.