What Does a Charge-Off Mean on a Credit Report?

A charge-off represents a negative entry on a credit report, signaling to potential lenders that a debt has become significantly delinquent and the original creditor has ceased internal collection efforts. This designation can impact an individual’s financial standing and ability to obtain new credit. Understanding charge-offs and how to address them is important for managing financial health.

Defining a Charge-Off

A charge-off occurs when a creditor, such as a bank or credit card company, determines that a debt is unlikely to be collected and writes it off as a loss on their accounting books. This internal accounting procedure happens after a borrower has failed to make payments for an extended period, commonly between 120 and 180 days past the due date. For credit cards, this timeframe is often 180 days.

Despite being written off as a loss by the creditor, the debt is not forgiven or erased. The borrower remains legally obligated to repay the amount owed. The creditor may transfer the debt to an internal late-accounts department, or sell it to a third-party collection agency.

A charge-off signifies that the original creditor has given up on collecting the debt themselves under the original terms. The account is closed to future charges once it is charged off. The debt itself persists and can still be pursued by the original creditor or a subsequent debt buyer.

Implications for Your Credit Report

A charge-off has a negative impact on an individual’s credit report and credit score. It indicates a failure to repay a debt as agreed, which is a significant factor in credit scoring models. The account status on the credit report will be updated to “charge-off,” clearly showing the delinquency.

The presence of a charge-off can cause a drop in credit scores, making it difficult to obtain new credit, loans, or even housing. Lenders view charged-off accounts as an indicator of financial risk. This can lead to denials for credit applications, or if approved, much higher interest rates and less favorable terms.

A charged-off account remains on a credit report for up to seven years from the date of the original delinquency. This seven-year period begins from the first missed payment that led to the charge-off, not the date the account was actually charged off. Even if the debt is later paid or settled, the charge-off notation will remain on the report for this entire duration, though its impact may lessen over time.

If the original creditor sells the charged-off debt to a collection agency, the debt may appear twice on the credit report: once from the original creditor as a charge-off, and again from the collection agency. This dual reporting can complicate the credit profile and affect credit scores. The payment history is severely affected by the missed payments leading up to and including the charge-off.

Addressing a Charged-Off Account

Individuals with a charged-off account have options for addressing the debt. Paying the debt in full will not remove the charge-off from the credit report before the seven-year period expires. However, the status will be updated to “paid charge-off,” which is viewed more favorably by lenders than an unpaid charge-off.

A consumer can negotiate a settlement with the original creditor or the collection agency. This involves agreeing to pay a portion of the total debt in exchange for the remainder being forgiven. If a settlement is reached and paid, the credit report status may be updated to “settled,” indicating that the account was resolved for less than the full amount. While a settlement can provide financial relief by reducing the amount owed, it may still negatively affect credit scores, though potentially less so than leaving the debt unpaid.

Collection agencies often purchase charged-off debts from original creditors. These agencies then pursue collection efforts, which may include phone calls and letters. When engaging with a collection agency, verify the debt’s validity and get any agreements, especially settlement terms, in writing before making payments.

Consumers have the right to dispute inaccuracies related to a charge-off on their credit report. If the reported information is incorrect or unverifiable, a dispute can be filed with the credit bureaus (Experian, Equifax, and TransUnion) or directly with the creditor. The credit bureau is required to investigate the dispute, within 30 days, and correct or remove any inaccurate information. A legitimate and accurate charge-off cannot be removed from a credit report through this process.