How to Fix Bad Credit With Charge Offs

A charge-off occurs when a creditor, such as a bank or credit card company, determines that an outstanding debt is unlikely to be collected and writes it off as a loss. This typically happens after prolonged non-payment, around 180 days past the due date. While the creditor considers the account a loss for accounting purposes, the borrower remains legally obligated to repay the debt.

A charge-off on a credit report significantly impacts an individual’s credit score. Payment history is a major component of credit scoring models. Missed payments leading to a charge-off, combined with the charge-off itself, cause a decrease in credit standing. This negative mark can remain on credit reports for up to seven years from the original delinquency date, making it challenging to obtain new credit or favorable interest rates. This article provides steps to address charge-offs and improve your credit profile.

Obtaining and Reviewing Your Credit Reports

To address charge-offs, first obtain and review your credit reports. Consumers are entitled to a free copy from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once every 12 months via AnnualCreditReport.com. Checking these reports helps identify discrepancies or negative entries.

Examine your credit reports for accounts marked “charge-off.” For each, verify the creditor’s name, account number, original debt amount, and charge-off date. Note if the status is “charge-off,” “paid charge-off,” or “settled charge-off.”

Cross-reference information across all three credit reports for consistency. An account might be reported differently by each bureau, or only appear on one or two. Pay close attention to the payment history, looking for inaccuracies in reported missed payments or the date of first delinquency.

Addressing Inaccurate Charge-Offs

If your review reveals a charge-off that appears inaccurate, incomplete, or unverifiable, you have the right to dispute it. The Fair Credit Reporting Act (FCRA) outlines the dispute process. Dispute directly with each credit bureau reporting the inaccurate charge-off, online, by mail, or by phone.

When filing a dispute, state the specific account and why you believe it is inaccurate. Provide supporting documentation like payment records, account statements, or correspondence with the original creditor. The credit bureau generally has 30 days to investigate, extending to 45 days if you provide additional information.

If the credit bureau’s investigation confirms the information is inaccurate or cannot be verified, they must remove or correct the entry. If accurate, the bureau will inform you. You can also dispute directly with the original creditor or the collection agency that owns the debt. They are required to investigate and respond.

Strategies for Valid Charge-Offs

When a charge-off is legitimate, strategies can help mitigate its impact. One approach involves negotiating with the original creditor or the collection agency that now owns the debt. You may propose a lump sum settlement for less than the full amount owed, as creditors often prefer to recover some debt. Aiming for a settlement between 40% to 60% of the original balance can be a starting point.

If a lump sum is not feasible, you can set up a payment plan. This involves regular, smaller payments over an extended period until the debt is satisfied. Before making any payment, verify the debt’s legitimacy and the collection agency’s legal authority to collect. Request a debt validation letter, including the original creditor, amount owed, and proof of collection rights.

A “pay-for-delete” agreement is another strategy, though less common and not guaranteed. This involves negotiating with the collection agency to remove the charge-off from your credit report in exchange for payment, either in full or a negotiated settlement. If an agency agrees, ensure you receive the agreement in writing before payment, explicitly stating they will request removal.

Paying or settling a charge-off typically results in the entry being updated to “paid charge-off” or “settled charge-off.” This updated status, while not removing the negative mark, signals to future lenders that you have taken responsibility for the debt, which can be viewed more favorably than an unpaid charge-off. Secure any agreement in writing, detailing payment terms and credit reporting outcome.

Establishing Positive Credit History

After addressing existing charge-offs, building a positive credit history is important for financial health. Secured credit cards offer an accessible pathway for re-establishing credit. These cards require a cash deposit, which serves as your credit limit, reducing risk for lenders. Using a secured card responsibly by making small purchases and paying the balance in full and on time each month demonstrates reliable credit behavior.

A credit builder loan, available from some credit unions or community banks, is another option. Funds are held in a savings account or certificate of deposit while you make regular payments. Once repaid, you receive the funds, and timely payments are reported to credit bureaus, contributing positively to your payment history. This demonstrates your ability to manage installment debt.

Becoming an authorized user on a trusted individual’s credit card can also aid in credit rebuilding. The primary cardholder’s positive payment history and low credit utilization can reflect positively on your credit report. This strategy carries risks, as the primary cardholder’s irresponsible use could negatively impact your credit, so choose this option with caution and clear communication.

Making all payments on time is the most impactful action for credit improvement. Payment history accounts for 35% of your FICO Score. Maintaining low credit utilization, ideally below 30% of available credit, also significantly influences your score. Diversifying credit types, such as revolving credit and installment loans, can positively contribute to your credit profile by demonstrating your ability to manage various forms of debt. Monitoring your credit reports for accuracy helps ensure your efforts are reflected correctly.