What You Should Know About a Charge-Off on Your Credit Report

When navigating your credit report, one key term you should know is “charge-off.” A charge-off on credit reports occurs when a delinquent account has been written off as a loss by the lender. No future charges can be placed on the account, and it usually goes into collections.

This can have a significant impact on your credit score and can make it harder to qualify for future loans. By understanding how charge-offs happen, what they mean for your credit history and how to resolve them, you can take steps to address unpaid debt and resolve negative accounts.

What is a charge-off?

A charge-off occurs when a creditor writes off your account as a loss. This is done with delinquent accounts that have missed payments, typically, for 180 days — the exact time frame depends on the lending agreement. It may also occur when you file for bankruptcy or if you aren’t making the minimum monthly payment on your account.

It’s also worth noting that a charge-off generally won’t come as a total surprise. Lenders usually inform account holders before they charge off the account.

If you aren’t able to reach a payment agreement after the lender contacts you, the lender may follow through with a charge-off and report it to the credit reporting agencies — Experian, TransUnion and Equifax. You’ll then see a note about the charge-off next to the account information on your credit report.

When a charge-off happens, the original lender will typically sell the account to a collection agency, who will then become responsible for collecting the debt from you. No new charges can be added to the account. 

Similar to when you close a credit card with a balance, you will still be responsible for paying off any unpaid debt on the account. However, the remaining balance will now be paid to the debt collection agency that purchased your debt from the original creditor.

You are legally obligated to pay the full amount of your past due debt. In fact, debt collectors can sue you if you refuse to pay a valid debt.

Why would you want to resolve charge-offs on your credit report?

A charge-off may lower your FICOcredit score. Thirty-five percent of your FICO score is determined by your payment history, while 30% is determined by the amount of money you currently owe.

This means that an unpaid charge-off negatively impacts both areas as it indicates a history of late payments as well as a balance you still owe. This bad debt may cause your score to tumble out of the “good” range, which may cause future lenders to think twice about lending to you.

But keep in mind, a charge-off can hurt your credit score before it’s made official by a credit card issuer or other lender. The months of missed or late payments that lead to a charge-off will start hurting your score well before the account is closed.

How to take care of charge-offs

If you believe a charge-off is listed on your credit report in error, you have the right to contact the credit bureau that is reporting the charge-off to dispute it. Removing a charge-off that was added to your account by mistake may help restore your credit score. AnnualCreditReport.com lets you get your reports from each credit bureau for free once per year.

However, if a charge-off is valid, you will want to work toward paying it off. After a debt collection agency contacts you about the charge-off, you will typically negotiate a payment plan with them. 

As part of the payment arrangements, you may be able to negotiate getting the charge-off removed from your credit report. This is known as “pay for delete,” and you may need to pay an extra fee to get the charge-off removed. It’s a good idea to make these requests in writing so that you have them for your records.

While pay for delete isn’t always an option, repayment will at least ensure that the information about the charge-off is updated to reflect that you’ve paid the balance in full or reached a settlement agreement. 

For larger balances, the debt collection agency is more likely to agree to a settlement rather than requiring you to pay the balance in full. However, pay-for-delete agreements are typically only offered when you pay the full debt amount.

Improving your credit after a charge-off

Whether you resolve your charge-off or not, in most circumstances, a charge-off will stay on your credit report for seven years from when the account first became delinquent. The rules established by the Fair Credit Reporting Act require that negative items be removed after this time frame. However, if you resolve your charge-off, the account will be marked as either “paid in full” or “settled” on your credit report.

While a paid charge-off account won’t be removed from your credit report right away — unless you reach a pay-for-delete agreement — it can improve how future lenders perceive you. When you try to open a new credit account, the lender will see that you either paid off the account in full or settled the debt.

Since a paid charge-off may still appear on your credit report for a while, what effect will it have on your credit score, and what can you do to improve your credit score?

The act of paying a charge-off account may improve your score, depending on the scoring system used by a particular lender.

• VantageScore doesn’t include zero-balance charge-off accounts when calculating your score.

• If a charge-off was due to medical collections, newer versions of the FICO scoring model will weigh it less heavily than other charge-offs and collections accounts. Medical collections won’t be counted at all once they’ve been paid off.

Even if a paid charge-off doesn’t necessarily improve your payment history, it will at least alleviate your debts owed, which may increase your score. As time progresses, the charge-off will have less of an impact on your credit score until it disappears from your credit report.

There are other actions you can take to improve your score and avoid additional charge-offs in the future, such as: 

• Making on-time payments for all other credit accounts — like credit cards, personal loans and lines of credit

• Keeping your credit utilization low

If you find yourself having trouble keeping up with your minimum monthly payments, consider reaching out to your lender. You may be able to negotiate a new payment agreement with them rather than letting an unpaid account go into collections.

Take action to improve your financial future

Whether the account that has been subjected to a charge-off is a credit card or another type of credit, there is no denying that it can add stress to your life. With the mark on your credit report and the negative impact on your credit score, a charge-off could even interfere with your ability to qualify for an auto loan or home loan.

If you need help paying off debt from credit cards, consider using Tally†. By combining your credit card debts into a single monthly payment, Tally can help you avoid the missed or late payments that lead to a charge-off.

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.