What is a Charge Off?
When you don’t pay back a debt, the lender or creditor can close out your account, mark the debt as noncollectable and claim it as a business loss on their taxes—this sequence is known as a charge-off. This doesn’t mean it’s off your hands, though, since the debt is likely sold to a collections agency. In fact, you’re still responsible for the debt, whether by paying it off or settling, and it will also cause a derogatory mark on your credit report. Here we go over what a charge-off is, how to handle it and what it means for your financial health.
What Does a Charge-off Mean on Your Credit?
When an account is charged off, it leaves a negative mark on your credit report. Your credit score will likely suffer, and it’s a sign to creditors that you’re not financially responsible, which can hurt your chances of getting a loan in the future. Charge-offs show up on your credit report, so it’s important to regularly check your credit report to stay up-to-date on your financial health.
A charge-off doesn’t occur in a vacuum. Think of it this way: Your credit card bill keeps rising and you keep missing payments—as a result, interest payments pile up. Not so suddenly, it’s unmanageable, and you opt to do nothing about it. This lack of payment is recognized by your creditor as delinquency, and it doesn’t go unnoticed.
Typically after 120–180 days of no payments, your credit card company will get the message that you aren’t going to pay them back. They then sell your debt to a third-party collections agency to get rid of the account and claim the unpaid balance as a business loss on their taxes. A credit lender can also charge off payments that are below the minimum amount if the debtor doesn’t make up for them—this is also a sign of delinquency. The collections agency can then proceed to contact you in order to get the remaining debt paid.
How long does a charge-off stay on your credit report?
A charge-off will stay on your credit report for seven years—whether you pay off the debt or not. This doesn’t mean you should just live with the debt and wait for the mark to fall off your credit report. You’re still responsible for paying it, and avoiding it poses serious risks to you and your financial health. Even if you pay it, it will still appear on your credit report as “paid” or “settled.”
In certain cases, you may be able to negotiate with lenders to have it removed from your credit report before those seven years are up—more on that below.
How to Remove a Charge-off
You cannot remove a charge-off from your credit report just by paying off or settling your debt. The only way to actually remove it from your credit report is by negotiating with your creditor after you’ve paid it off.
Regardless of your financial standing, there are things you should (and must) do when you have a charge-off tacked on your credit report. Before you dive into a dispute or pay back the debt, take a step back and address the situation to take the proper action.
Verify the charge-off
Verification of debt is your first step before you even tackle the charge-off. If you check your credit report and notice a charge-off, contact the lender responsible to verify. Unfortunately, credit mistakes are common, so it pays to keep an eye on your report for situations like this. Verifying your debt is an important process, so be sure you:
- Gather evidence to verify the mistake (payment history, balance statements, record of closed accounts, etc.)
- Send a credit dispute letter to outline the mistake(s)
- Allow 30–45 days for investigation, then follow up
If a charge-off on your credit report is in fact valid, you won’t actually be able to dispute it. You still need to verify the charge-off, but once you do, move on to negotiating with your lender to understand your options.
Negotiate with the lender or collections agency
Depending on your situation, the original creditor or collections agency may be willing to work with you. For example, if you experience some sort of financial hardship that prevents timely payments and ultimately results in a charge-off on your record, you may be able to vouch for yourself.
In this scenario, you’re still obligated to pay the debt, whether to the original creditor or the collections agency that now holds it. You can try sending them a pay-for-delete letter, which essentially asks them to remove the debt from your credit report if you pay the full amount or come to a settlement.
Reminder: Get everything in writing and take diligent notes along the way. Having a paper trail will help you keep track of what’s going on and help you make the wisest money moves.
Take care of your debt
The time has come to take care of your debt. Whether you pay it off with the original creditor or collections agency, or you opt for a settlement, you’re still responsible for paying it off. And just because you pay it off, it doesn’t mean your charge-off will go away—we know, it’s a bummer.
This is why your paper trail is so important. Keep track of everything early and get in touch with your creditor or the collections agency early—these are your best bets for succeeding with the above steps.
Charge-offs are tricky to navigate. If you’re dealing with a particularly sticky situation or just need a second opinion, a credit repair professional can offer a valid perspective. Our team has the expertise to help you understand which path is right for you and your credit health. Schedule a consultation today.
from a Credit Expert