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A charge-off is a debt that a creditor has given up trying to collect on after you’ve missed payments for several months.
These can include balances from a credit card, mortgage or other debt you take on. As a last resort, the creditor can decide that the debt is a loss for the company and designate it as “charged off.”
But that doesn’t mean you’re off the hook. Even though your account is charged off and the creditor reports it as a loss, you’re still responsible for paying back the debt. And the charge-off can remain on your credit reports for up to seven years from the date your first missed payment was reported.
Here’s how a charge-off can affect your credit, how to tell if it’s accurate, and how you can pay it and try to get it removed from your reports.
How does a charge-off end up on your credit reports?
Once the creditor writes off your account, it may report the account as charged off to the credit bureaus, which translates as a derogatory mark on your reports.
This derogatory mark can stay on your reports for up to seven years from the date of the first payment you missed.
The creditor may have sold your account to a third-party collections agency if the debt was unsecured. In that case, the account could also appear as an account in collections on your reports.
If this happens, your credit scores may dip, and it may be more difficult to qualify for credit or get competitive interest rates.
How much can a charge-off affect your credit?
Think back to the months before your account was officially charged off — you probably missed a number of payments. These missed payments alone can significantly damage your credit, because payment history is a major factor in determining your credit scores.What factors affect your credit scores?
But your scores will most likely suffer further if the account is finally listed as a charge-off because of that derogatory mark.
Next, if your account is in collections, it could also lower your scores. And not paying the collections agency can further damage your credit, because the agency can report missed payments to the credit bureaus.
There’s a bit of good news: If you show that you use credit responsibly from here on out — like making on-time payments and being proactive about your debt — then the effects of derogatory marks on your credit reports can begin to diminish after about two years.
How you can try to remove a charged-off account from your credit reports
If there’s a charged-off account on your credit reports, one of the first steps is to verify the information.
To make sure the information about your charge-off is correct, here are a few things to look for.
- Your account may be sold a few times through third-party collections agencies. Make sure each sold account is marked “closed” and has a zero balance. Only the most current collections account should be listed as open.
- Check the outstanding balance. If it’s more than you think it should be, ask the creditor to explain any additional costs or make the correction.
- Verify the charge-off date on the original account as well as any offspring accounts in collections. The charge-off date should be the date of your first delinquent payment on the original account.
If you have an error on a credit report or the charge-off doesn’t fall off your reports after seven years, you can file a dispute on your TransUnion® credit report using Credit Karma’s Direct Dispute™ tool. The credit bureaus are required to investigate disputes (as long as they’re not frivolous) and generally review them within 30 days of the filing date.
According to Freddie Huynh, vice president of credit risk at Freedom Financial Asset Management, if a charge-off listed on your credit reports is legitimate, “there isn’t a whole lot that a consumer can do to remove it.”
One thing you can do is try to negotiate with the original lender. If the lender hasn’t sold the account, you can offer to pay the debt in full in exchange for the charge-off note to be removed from your reports. The lender doesn’t have to remove the information if it’s accurate, but it’s possible.
Otherwise, you can just wait out the clock. A charge-off should automatically drop off your credit reports after seven years.
How to pay charged-off accounts
Once a debt is charged off, it may be tempting to not pay it, since your lender has likely stopped trying to collect on the account. But as long as the debt is yours, you’re legally responsible for it until it’s …
- Discharged in a bankruptcy filing
Plus that charge-off can hurt your chances of getting a loan — some lenders may ask you to pay all outstanding debt before you can take out a mortgage or other type of loan.
Here are three ways to pay a charged-off account.
- Work with the original lender. If the debt hasn’t been sold to a collections agency, you can work with the original lender to pay back the debt. Once it’s paid off, the lender should change the status of the account to “paid charge-off” and update the balance to zero. Lenders usually see a paid charge-off as more favorable than unpaid debt.
- Settle the debt. If you’ve decided to negotiate a settlement and either the original lender or the collections agency accepts less money than originally agreed, keep this in mind: It should appear on your credit reports as a “settled” charge-off. This could negatively impact your credit scores, but the account won’t be sent to collections.
- Pay the collections agency. If the creditor has sold the account to a collections agency, then you’d pay the agency. Before you do, write to the agency and ask for proof that it owns the account. After you’ve paid off the debt, the account will appear on your reports as “paid collection,” which may be viewed more favorably by lenders than an unpaid account.
Once you’ve paid off the debt, through the original creditor or the collections agency, or via settlement, make sure you ask for a final payment letter. And keep checking your credit reports — if the account isn’t shown as paid, you’ll have the letter as proof you can use to help get your reports corrected.
If you’ve defaulted on payments, your account may have been charged off. Check your credit reports, which should list any accounts with this status. Verify that all the info is accurate, and then decide how you can pay off the debt or dispute any errors.
Once you’ve taken care of the charge-off, take healthy credit steps to help improve your credit.
And consider any new debt carefully. Huynh calls it “preventive medicine.”
“Avoid obtaining too much credit that you can’t responsibly pay back,” he says.