Can a Charged Off Account Still Report Late Payments?
Navigate the complexities of charged-off accounts. Understand their reporting nuances and lasting credit impact, gaining clarity on how to manage your financial record.
A charged-off account occurs when a creditor determines a debt is unlikely to be collected and writes it off as a loss. This action is a serious negative mark, indicating a prolonged period of non-payment. Understanding its implications is important for anyone managing personal finances.
Understanding Charged-Off Accounts
A charged-off account occurs when a creditor writes off a debt as a loss for accounting purposes. This typically happens after a borrower has failed to make payments for an extended period, often between 120 and 180 days past the due date. For example, credit card accounts are commonly charged off after 180 days of missed payments, while auto loans might be charged off after 120 days.
A charge-off does not mean the debt is forgiven or erased. The borrower remains legally obligated to repay the full amount owed. Creditors may still pursue collection through internal departments or by selling the debt to a third-party collection agency. The charge-off is primarily an internal accounting adjustment for the original creditor.
Credit Reporting Practices for Charged-Off Accounts
Once an account is charged off, the original creditor generally stops reporting monthly late payments. Instead, the account status on a credit report will change to reflect the charge-off. It will typically be listed as “charged off,” “written off,” or a similar designation. This status serves as a severe indicator of the delinquency that led to the charge-off.
The account will display a zero balance with the original creditor if the debt is sold to a collector. However, if the creditor simply writes off the debt internally without selling it, the original balance might still appear, but the account will be marked as charged off. The charge-off event itself is a significant negative entry that remains on the credit report.
When a debt collector acquires a charged-off debt, they may open a new account on the credit report to reflect their ownership. This new entry will typically indicate a collection status. It is possible for both the original charged-off account and the new collection account to appear simultaneously on a credit report.
Impact on Your Credit Score and Report Longevity
A charged-off account has a significant negative impact on an individual’s credit score. It is considered one of the most damaging marks on a credit report because it signals a history of severe non-payment. Payment history is a primary factor in credit scoring models, accounting for a significant portion, such as 35% of a FICO score.
The initial missed payments leading to the charge-off cause the most significant drops in a credit score. A charge-off can cause a credit score to decrease by dozens or even hundreds of points. This negative entry can make it difficult to obtain new credit, loans, or even secure housing or insurance.
A charged-off account remains on a credit report for up to seven years. This period begins from the date of the original delinquency that led to the charge-off, not from the date the account was officially charged off. While its negative impact diminishes over time, the charge-off remains significant for the entire reporting period.
Addressing Charged-Off Accounts on Your Credit Report
Consumers can take steps to address charged-off accounts appearing on their credit reports. The initial action involves verifying the accuracy of the information reported by obtaining credit reports from the three major credit bureaus. If any details, such as the account number, date of last payment, or amount, are incorrect, consumers have the right to dispute these inaccuracies with the credit bureaus. The Fair Credit Reporting Act (FCRA) mandates that credit bureaus investigate disputes within 30 days, and remove or correct information if it is found to be inaccurate or unverifiable.
If the information is accurate, consumers have options to resolve the debt itself. Paying the debt in full is one approach; while it will not remove the charge-off from the report before the seven-year mark, the account status will be updated to “paid charge-off” or “paid in full.” This updated status is viewed more favorably by potential creditors than an unpaid charge-off and can help improve credit scores over time.
Another option is to negotiate a settlement with the original creditor or the collection agency. This involves agreeing to pay a portion of the debt, often 30% to 50% of the outstanding balance, in exchange for the debt being considered settled. The account status would then be updated to “settled for less than full amount.” While settling can provide financial relief, any forgiven debt may be considered taxable income by the IRS.