What Are Charge-Offs on Your Credit Report?

A charge-off occurs when a creditor determines that a debt is unlikely to be collected and formally writes it off as a loss on their accounting books. This is an internal accounting action and does not mean the consumer is no longer legally obligated to repay the debt. It simply reflects the creditor’s assessment that active collection efforts are unlikely to succeed.

What a Charge-Off Means

This typically occurs after a prolonged period of non-payment, often 120 days past due for installment loans and 180 days for revolving credit accounts like credit cards.

It is a common misunderstanding that a charge-off means the debt is forgiven or canceled. It is an accounting adjustment for the creditor, allowing them to remove the debt from their balance sheet as an asset and classify it as a loss. Despite this, the consumer remains legally responsible for the full amount owed, and the creditor retains the right to pursue collection.

How Charge-Offs Appear on Your Credit Report

A charge-off appears as a significant negative entry on a consumer’s credit report. When an account is charged off, its status on the credit report will be updated to reflect this, often showing as “charge-off” or “written off.” The entry will typically include the amount of the bad debt and relevant dates. While the balance on the original account might show as zero, this does not indicate the debt has been paid; it reflects the internal write-off by the original creditor.

The presence of a charge-off can severely damage a consumer’s credit score. Payment history is a primary factor in credit scoring models, and a charge-off indicates a failure to meet repayment obligations. This negative mark can remain on a credit report for up to seven years from the date of the original delinquency, which is usually the date of the first missed payment that led to the charge-off. This lengthy presence can make it challenging to obtain new credit, loans, or even secure housing or insurance.

Post-Charge-Off Activity

After an account is charged off, the original creditor may continue their attempts to collect the debt through their internal collections department. Alternatively, the creditor may sell the charged-off debt to a third-party debt collector or collection agency. This is a common practice, as it allows the original creditor to recover at least a portion of the loss. When a debt is sold to a collection agency, the consumer will then owe the debt to the new entity.

It is important to distinguish between a charged-off account and a collection account. A charge-off refers to the status of the original debt as written off by the original creditor. A collection account, on the other hand, is a separate entry created when a debt is placed with or sold to a collection agency. If the original creditor and the collection agency both report to the credit bureaus, the charge-off may appear twice on the credit report—once from the original creditor and once from the collection agency.

Resolving a Charged-Off Account

Consumers have several options for addressing a charged-off account, although the charge-off itself generally remains on the credit report for the full seven-year period.

One approach is to pay the debt in full. While this does not remove the charge-off entry, the status on the credit report will typically update 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 standing over time.

Another option is to negotiate a settlement with the original creditor or the debt collection agency for less than the full amount owed. If a settlement is reached and paid, the account status on the credit report may update to “settled for less than full amount” or “settled,” though this still indicates the original terms were not met. The forgiven portion of a settled debt may have tax implications, as it could be considered taxable income. In severe cases of financial distress, individuals might consider bankruptcy to discharge eligible debts, including charged-off accounts. However, bankruptcy has significant and long-lasting impacts on a credit report.