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A charge-off is a debt that a creditor has given up trying to collect on after the debtor — the person who borrowed the money — has missed payments for several months.
When you have any type of debt payments to make, you could potentially end up with an unpaid charge if your account becomes delinquent. This could happen with credit card debts, or with installment loans like an auto loan, personal loan or student loan.
Regardless of the type of debt, a charge-off means that, as a last resort, the creditor can decide that the debt is a loss for the company and designate it as a charged-off account, or “charge-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 the credit history that shows up 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?
- How much can a charge-off affect your credit?
- Should you pay a charged-off account?
- How to pay charged-off accounts
- How do you remove a charge-off from your credit 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 a seven-year period 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.
What’s the difference between a charge-off, write-off and transfer?
A charge-off and a write-off are the same thing: A creditor decides you probably won’t pay back the debt and stops you from making additional charges on the account after your account has become seriously delinquent. This can have a negative effect on your credit. On the other hand, a “transfer” can be neutral. It means the original creditor has sold your account or moved it to a different creditor. The account may be transferred in good standing or listed as a charge-off.
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.
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, though: 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. And, thanks to the Fair Credit Reporting Act, you have the right to have negative information like a charge-off removed from your credit reports after seven years.
Should you pay a charged-off account?
First, it depends on whether or not the charged-off account is accurate. 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 the charge-off is legitimate
If after investigating you find that the charge-off on your reports is legitimate, it’s important to take action and pay it off. It may be tempting to not pay a charge-off, 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.
If the charge-off is an error
Don’t pay an erroneous charge-off. Instead, 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.
How to pay charged-off accounts
Work with the original lender
If the debt hasn’t been sold to a collections agency, you can work with the original lender to make payment arrangements. 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.
How do you remove a charge-off from your credit reports?
According to Freddie Huynh, vice president of data optimization at Freedom Debt Relief, 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.
Some debt collectors may offer to remove the charge-off note from your credit reports — this is sometimes known as a “pay for delete” offer. But keep in mind that lenders are required to report accurate and complete information, so any “pay for delete” service is unlikely to be successful.
Otherwise, you can just wait out the clock. A charge-off should automatically drop off your credit reports after seven years.
Once you’ve taken care of the charge-off, take healthy credit steps to help improve your credit. For example, consider credit counseling services to help you make a budget and avoid delinquent payments in the future.