Are Charge-Offs Bad for Your Credit?

A charge-off represents a declaration by a creditor that a debt is unlikely to be collected. This accounting action typically occurs after an extended period of non-payment. Understanding its nature and impact on credit is important for consumers.

Understanding Charge-Offs

A charge-off is an internal accounting adjustment where a creditor writes off a debt as a loss on their books. This signifies the creditor no longer expects to collect the outstanding balance. For revolving credit accounts, such as credit cards, this usually happens after 120 to 180 days of continuous non-payment. For installment loans, the timeframe may vary but also follows a prolonged period of delinquency.

A charge-off does not mean the debt has been forgiven or erased; the consumer remains legally obligated to repay the money. After an account is charged off, the original creditor may close the account and cease direct collection efforts. The creditor might then sell the debt to a third-party collection agency or assign it to a collection agency to pursue repayment on their behalf.

How Charge-Offs Affect Your Credit

A charge-off is a severe negative mark on a credit report and has a significant impact on credit scores. Payment history is a primary factor in credit scoring models, often accounting for a substantial portion of a FICO Score. A charge-off reflects a prolonged history of missed payments, signaling a high level of risk to potential lenders.

A charged-off account can remain on a credit report for up to seven years from the date of the original delinquency. This period typically begins from the date of the first missed payment that led to the charge-off, not the date the account was officially charged off. Even if the debt is eventually paid or settled, the charge-off entry generally remains on the credit report for this entire seven-year duration, though its impact may diminish over time.

The presence of a charge-off on a credit report can make it difficult to obtain new credit. Lenders view charged-off accounts as an indication of a borrower’s inability or unwillingness to meet financial obligations, leading to denials for new loans, credit cards, mortgages, or auto loans. When credit is extended, it often comes with less favorable terms, such as higher interest rates, due to increased risk. A charge-off can also affect rental applications, insurance premiums, and employment background checks.

Steps After a Charge-Off

If a charge-off appears on a credit report, obtain copies of credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. Consumers are entitled to a free report from each bureau annually, which allows for a thorough review of the charge-off details and verification of accuracy. If any inaccuracies are identified, such as incorrect amounts or dates, the consumer has the right to dispute this information with the credit bureaus under the Fair Credit Reporting Act (FCRA).

After reviewing the report, contacting the original creditor or the collection agency (if the debt was sold) is an option to discuss payment arrangements. Consumers may be able to negotiate a settlement for less than the full amount owed, often as a lump-sum payment, or establish a payment plan. While paying or settling the debt will not remove the charge-off from the credit report, it will update its status to “paid charge-off” or “settled charge-off,” which can be viewed more favorably by future creditors.

Paying or settling a charged-off debt is generally advisable, even though the negative entry remains on the report. This action can prevent further collection efforts, including potential legal action or wage garnishment, and demonstrates a commitment to resolving financial obligations. While the immediate impact on a credit score may not be dramatic, resolving the debt can contribute to long-term credit rebuilding efforts.