A charge-off is a type of debt that collectors have decided is unlikely to be collected. Charged-off accounts can be a big problem for your credit score, as they are a sign of major delinquency. You are also still responsible for the debt and the negative marks it leaves on your credit reports.
However, there are ways to pay the debt back and in some cases you may even be able to get a charge-off removed from your credit report.
What is a Charge-Off?
If you are seeing a charge-off on your report, it typically means the lender or credit institution has noticed you are very delinquent on payments, and they are likely not going to be collecting their money.
This usually occurs after 6 months of unpaid bills from a credit card, mortgage, or other credit lines. Creditors will typically choose to record it as a loss for themselves, deem the account "uncollectable" and then designate it as charged-off.
This is not without repercussions for you, however.
How Does a Charge-off Affect You?
First of all, just because the company has given up on collecting your past due debt, it does not mean that you are free from that debt. You are still responsible for paying that debt as well as any additional fees you incur for late payments and interest.
Even moreso, charge-offs can cause some significant damage to your credit score.
A charged-off account is commonly the result of multiple delinquent payments. Each of those missed payments leaves a derogatory mark on your credit report that only gets worse as time goes on without making a payment. Additionally, because payment history is such a big part of your credit report, these delinquent payments alone may be enough to significantly reduce your credit score.
The charge-off itself also leaves another negative mark on your credit report.
A charged-off account will often be sold to a collection agency, which can lower your credit score even more. Not only that, but not paying payments to a collection agency can also result in further derogatory marks to your credit report, as the agency can report these missed payments to the credit bureaus. This will make it extremely difficult to qualify for loans and credit in the future.
To put it simply: a charged-off account does significant damage to your credit score, and is not worth the headache. It can take a significant amount of time and effort to fix it, so it's best to try and avoid getting a charge-off in the first place.
Removing a Charged-Off Account
Luckily, there are a couple ways to remove a charged-off account from your credit history if you do happen to get one.
First Verify the Charge-Off
Before moving forward, carefully inspect your credit report and compare it to your own records to ensure the charged-off account is indeed accurate. Make sure the account belongs to you, and make sure all payment history is recorded accurately.
Remember that your debt may be sold a few different times to various collection agencies. Each time it is sold, the previous account with the former collection agency should be listed as "closed". However, accidents do happen. Sometimes these collections agencies neglect to close their account, and your credit report may be suffering from two or more derogatory notes for charge-offs when you should only have one.
Dispute Incorrect Charge-Offs
If you find an incorrect charge-off or an additional opened account on your credit report, you can file a dispute for the credit bureau to review. The bureau is required to handle dispute claims within 30 days in most cases.
With that said, if the charge-off is correct, there is not much you can do outside of taking responsibility for the mistake and working to fix it. However, it's fairly common for collection agencies to keep poor records and get information wrong. If they end up reporting unverifiable debt to the credit bureaus (yes, even if the original account belonged to you), these collections can sometimes be removed from your credit report by disputing them.
Pay the Debt
The most important step in dealing with charge-offs is to pay off the debt, if it can't be disputed. It can be tempting to ignore it, but many times outstanding debt can have long-lasting effects. For instance, some lenders wont allow a person to take out a loan until all their outstanding derogatory debt is paid off.
With that said, there are three main ways to pay off a charged-off account.
Pay the original lender – If the account hasn’t been sold, you can work to pay back the debt to the original lender. A paid charge-off may look better on your credit report than unpaid debt.
Pay the collections agency – If the creditor has sold off your debt to a collections agency, write to the agency asking for proof they own the debt. Once they provide the proof, work with them to pay off your debt and avoid further derogatory marks on your credit. If they fail to provide proof, once again you can dispute this account with the credit bureaus.
Settle the debt – Sometimes it is possible to negotiate a settlement with either the original lender or the collection agency. In these cases it may be possible to pay off less than what you actually owe. However, keep in mind that a settled debt appears differently than a paid debt, and may negatively impact your future lending.
In any case, paying off the debt is the first step on the road to repairing your credit. Make sure you also get a final payment letter from the agency you paid off, which proves you have satisfied the debt, and keep it for your own personal credit reporting.
A charged-off account can be a credit nightmare. While there are some minor tweaks and adjustments to make, ultimately a charged-off account is your responsibility to pay - and doing so can put you on the path towards healing your credit.