What is a charge-off?

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?
• What’s the difference between a charge-off and collections?
• 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 can I rebuild my credit after a charge-off?

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.

How much can a charge-off affect your credit?

In 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. The first missed payment may have the most negative impact on your credit, but every missed payment after will continue to hurt your credit.

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.

If you make positive credit moves 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 over time. 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.

What’s the difference between a charge-off and collections?

A charge-off on an account means that you’ve missed payments for a certain amount of time, and the lender has written your account off as a loss.

If you have an account in collections, it means that your lender has sent your debt to a third-party debt collector who will try to collect payments on your debt. Once your account gets sent to collections, your original lender no longer owns your debt, and you’ll have to work with the debt collector to pay off your debt.

Your account can both be sent to collections and have a charge-off simultaneously. Both will appear on your credit reports as well.

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 …

• Paid
• Settled
• 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?

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.

How can I rebuild my credit after a charge-off?

The first step to rebuilding credit after a charge-off is to pay off that debt. A paid charge-off is more favorable to lenders compared to an unpaid charge-off. While you pay off your account, you can also start implementing healthy credit habits to slowly build up your credit. Unfortunately, your scores won’t improve overnight.

Payment history is one of the main factors that go into credit scores — which means paying your bills on time is crucial. Building up a positive payment history can help your credit scores over time. If you have other outstanding debt, paying that down may also help. Credit utilization is another key factor in credit scoring. Try keeping your credit utilization below 30% of your total credit limit.

You should also keep an eye on your credit reports each month to ensure everything is accurate. If you find inaccuracies, dispute them with the credit bureaus. 

Next steps

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.