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

A charge-off is a significant event in personal finance, primarily impacting individuals navigating debt challenges. It signals a particular stage in the debt collection process and directly impacts an individual’s credit standing and future borrowing capacity.

What a Charge-Off Is

A charge-off is an internal accounting action taken by a creditor when a debt is deemed unlikely to be collected. This typically occurs after a prolonged period of non-payment, often 120 to 180 days past due. For the creditor, charging off a debt means writing it off as a loss on their financial statements, allowing them to remove the uncollectible debt from active accounts for accounting purposes.

Despite being written off, the consumer remains legally obligated to repay the debt. A charge-off is not a forgiveness of the debt; it signifies that the original creditor has ceased their own active collection efforts. This accounting adjustment usually takes place after the debt has progressed through various stages of delinquency, following attempts by the original creditor to collect.

How a Charge-Off Appears on Your Credit Report

When a debt is charged off, it is recorded on a consumer’s credit report. The account status will be noted as “charged off” or “written off.” This negative entry appears on credit reports from bureaus like Experian, TransUnion, and Equifax, indicating the outstanding balance at the time of the charge-off.

A charge-off remains on a credit report for up to seven years and 180 days from the first missed payment. This applies even if the debt is paid; however, the entry may be updated to “paid charge-off” or “settled.” The presence of a charge-off significantly impacts credit scores, potentially lowering them by 50 to 150 points. This derogatory mark signals to future creditors that the individual defaulted, making it more challenging to obtain new credit, loans, or favorable interest rates.

What Happens After a Charge-Off

After a debt is charged off by the original creditor, they may continue internal collection efforts or sell the debt to a third-party debt collection agency. Debt buyers acquire charged-off debt, often for a fraction of its original value, and then pursue the full amount owed. This transfer changes the party responsible for collection, but the obligation to pay remains.

Consumers can expect communication from collection agencies, including phone calls and letters, as they attempt to recover the debt. If a charged-off debt is sold, a new collection account may appear on the credit report in addition to the original charge-off. Creditors or debt buyers may also initiate legal action, such as filing a lawsuit to obtain a judgment, as long as the debt is within the state’s statute of limitations for collection.

Options for Addressing a Charge-Off

Addressing a charged-off debt begins with verifying its legitimacy. Consumers can request a debt validation letter from the debt collector, which legally obligates the collector to provide specific details about the debt, such as the original creditor’s name, amount owed, and charge-off date.

Negotiating a settlement with the original creditor or debt collector is a common approach. Consumers may propose a lump-sum payment for a reduced amount or arrange a payment plan. If a settlement is reached, obtain the agreement in writing, detailing the terms and confirming the account will be reported as settled or paid. While paying off a charged-off account does not remove it from the credit report, its status can change to “paid charge-off” or “settled,” which is viewed more favorably by some lenders.

If charge-off information on a credit report is inaccurate, consumers have the right to dispute it with the credit bureaus. This involves reviewing credit reports from Experian, Equifax, and TransUnion for discrepancies. Submit a formal request to the relevant credit bureau, along with supporting documents like payment records. If the dispute is successful, the inaccurate information should be removed.