How Does a Charge-Off Affect Your Credit?
Learn the significant impact of a charge-off on your credit score and report. Understand its long-term effects on your financial standing.
A charge-off represents a severe negative event for an individual’s credit standing. It signals to lenders that a debt has become significantly delinquent and is considered unlikely to be repaid. This financial designation has significant, long-lasting implications for credit health and future borrowing ability.
Understanding a Charge-Off
A charge-off is an internal accounting action taken by a creditor when they deem a debt uncollectible. This typically occurs after a period of prolonged non-payment, often between 120 and 180 days past the due date. From the lender’s perspective, charging off a debt means removing it from their active accounts and classifying it as a loss for accounting purposes.
Despite being written off by the original creditor, the underlying debt is not forgiven or erased; the consumer remains legally obligated to repay the full amount. After a charge-off, the original creditor may sell the debt to a third-party collection agency or assign it to a collector to pursue payment. Unlike a collection account, where debt is transferred to an agency, a charge-off is the original creditor’s declaration of uncollectibility.
Credit Score Impact
A charge-off significantly harms credit scores due to its severe impact on payment history, which is a major factor in credit scoring models. The extensive period of missed payments leading to a charge-off, combined with the charge-off itself, can cause a substantial and immediate drop in an individual’s credit score. Lenders view a charged-off account as a strong indicator of repayment risk.
A charged-off account generally remains on a credit report for up to seven years from the date of the original delinquency that led to the charge-off. This seven-year period begins from the first missed payment that initiated the delinquency, not necessarily the date the account was officially charged off. While its negative influence may gradually diminish over time, the charge-off continues to be a derogatory mark throughout its entire reporting period.
Reporting and Account Status
When an account is charged off, it appears on a credit report with specific status labels such as “Charged Off,” “Account Charged Off,” or “Bad Debt.” The original debt balance, even after being charged off, may still be reflected on the credit report. This entry serves as a clear signal to potential lenders about the prior inability to fulfill repayment obligations.
If a consumer takes action to address the charged-off debt, the account’s status on the credit report will update. If the full balance is paid, the status may change to “Paid in Full” or “Paid Charge-Off.”
If the debt is settled for less than the original amount owed, the status might be updated to “Settled for Less Than the Full Balance” or “Settled.” While paying or settling the debt will modify the account’s status and can be viewed more favorably by future creditors.