Does a Charge-Off Hurt Your Credit Score?

A charge-off represents a significant event in an individual’s financial history, indicating that a creditor has written off a debt as unlikely to be collected. This action holds substantial implications for one’s credit standing. Understanding what a charge-off entails and its effects on a credit profile is important for navigating personal finance.

Understanding a Charge-Off

A charge-off occurs when a creditor, such as a bank or credit card company, determines that an outstanding debt is unlikely to be repaid and removes it from its active accounts. This accounting practice treats the debt as a loss on the creditor’s books. An account typically reaches this stage after a prolonged period of non-payment, often between 120 to 180 days past the due date for most credit cards and loans.

A charge-off does not mean the debt is forgiven or erased; the consumer remains legally obligated to repay the amount owed. The creditor simply ceases internal collection efforts and writes off the debt for tax and accounting purposes. This differs from a collection account, where the debt might be sold to a third-party collection agency, shifting ownership of the debt. Both the original charge-off and the collection account may appear on a credit report.

Impact on Your Credit Profile

A charge-off significantly harms credit scores, as payment history is a primary factor in credit scoring models, accounting for a substantial portion of a FICO Score. The initial missed payments leading up to a charge-off already reduce the score, with the charge-off itself further compounding this negative impact. The severity of the damage can vary, but a charge-off indicates a default, signaling high risk to potential lenders.

On a credit report, a charged-off account is noted with a status like “charged off” or “account closed by grantor.” The report will display the balance at the time of the charge-off and the date of the first delinquency. A charge-off remains on credit reports for up to seven years from the date of the original delinquency, regardless of whether the debt is subsequently paid or settled.

While the negative impact may lessen over time, the presence of a charge-off on a credit report for its full duration can make it difficult to obtain new credit. Lenders view charged-off accounts as a strong indicator of past payment issues, which can lead to denials for loans, credit cards, or mortgages. If approved for credit, individuals with a charge-off may face less favorable terms, including higher interest rates, due to the perceived increased risk.

Navigating a Charged-Off Account

Even after an account is charged off, the debt is still legally owed to the original creditor or a debt collector. How a consumer addresses this debt impacts its appearance and continued influence on their credit report. While paying the debt in full will not remove the charge-off from the credit report, its status will update to reflect a “paid charge-off.” This status is generally viewed more favorably by lenders than an unpaid charge-off.

Alternatively, a consumer might settle the debt for less than the full amount owed. If a settlement is reached, the credit report will typically reflect a status such as “settled for less than full amount” or “settled.” This status is also more favorable than an unpaid charge-off, though generally less so than a debt paid in full. If the settled amount is $600 or more, the creditor may issue an IRS Form 1099-C, reporting the forgiven portion as taxable income.

If the charged-off debt remains unpaid, it will continue to be listed as “unpaid” on the credit report for the entire seven-year reporting period. This status will exert the maximum negative impact on creditworthiness. Unpaid charged-off debts may also be sold to collection agencies, which can then pursue collection efforts.