What Does Charge Off Mean on My Credit Report?

A “charge-off” on a credit report means a creditor has determined a debt is unlikely to be collected. This is an internal accounting adjustment, indicating they have written off the debt as a loss on their books. Despite this, the debt remains a legal obligation for the consumer. A charged-off account is a significant negative entry on a credit report, signaling a serious delinquency.

How a Charge-Off Appears on Your Credit Report

A charge-off typically begins with a series of missed payments. When a consumer misses a payment, the account enters a delinquent status, often noted in 30-day increments. Creditors usually attempt to contact the consumer to recover the outstanding balance during this period.

If payments remain unmade, an account is usually charged off after 120 to 180 days of delinquency. This means the creditor no longer expects to collect the debt and has recorded it as a loss for accounting and tax purposes. However, this internal write-off does not forgive the debt; the consumer remains legally responsible for repayment.

When an account is charged off, it appears on a credit report with a “charged off” status. The entry typically includes details such as the original creditor’s name, account number, balance at the time of charge-off, and the charge-off date. If the debt is later sold to a collection agency, it may appear twice on the report: once from the original creditor and again from the collection agency.

The Impact of a Charge-Off on Your Credit Profile

A charge-off carries substantial negative repercussions for a consumer’s credit standing. This derogatory mark signals to potential lenders that a debt was not repaid as agreed, making the consumer appear as a high-risk borrower. Consequently, a charge-off can lead to a significant decrease in credit scores.

The negative effect on credit scores is particularly pronounced because payment history is the most important factor in credit score calculations. The initial late payments and the charge-off itself compound this impact. This reduction in creditworthiness makes it difficult to obtain new credit, such as loans or credit cards, often resulting in denials or approval at higher interest rates.

A charged-off account remains on a credit report for up to seven years. This period typically begins from the date of the first missed payment, also known as the original delinquency date. While the charge-off continues to be a negative factor, its impact on the credit score may lessen as it ages. Even if the debt is paid, the charge-off entry remains on the credit report for the full seven years.

Options for Addressing a Charged-Off Account

Addressing a charged-off account involves several considerations.

Paying the Debt

One approach is to pay the charged-off debt, either the full outstanding balance or a negotiated settlement. If the full balance is paid, the account status on the credit report will typically be updated to “paid charge-off” or “paid in full.” This notation is viewed more favorably by future creditors than an unpaid charge-off.

Alternatively, a consumer can negotiate a settlement, agreeing to pay a portion of the debt. If a settlement is reached, the credit report status may be updated to “settled for less than full balance” or “paid settled.” While settling is better than not paying, it can still indicate that the original terms were not met. Any portion of the debt forgiven through a settlement might be considered taxable income by the IRS.

Disputing the Account

If a consumer believes a charge-off entry on their credit report is inaccurate or contains errors, they have the right to dispute it. This process is governed by the Fair Credit Reporting Act (FCRA), which allows consumers to challenge incorrect or unverifiable information. To initiate a dispute, obtain copies of credit reports from the major credit bureaus.

After reviewing the report for inaccuracies, a dispute can be filed directly with the credit bureaus or the data furnisher (the original creditor). Disputes can be submitted online, by mail, or by phone. Supporting documentation should be provided to substantiate the claim. The credit bureaus are required to investigate the dispute within 30 days and must remove or correct the entry if they cannot verify its accuracy.

Leaving the Account Alone

Choosing to take no action means the debt remains outstanding. The original creditor or a debt collector can continue collection efforts. The negative charge-off entry will persist on the credit report for the full seven-year period from the date of the original delinquency. While its impact on the credit score may diminish over time, an unpaid charge-off will hinder access to new credit and favorable lending terms.

Understanding Post-Charge-Off Collection Activities

Even after an account has been charged off, the debt remains, and the consumer is legally obligated to repay it. The original creditor may continue attempts to collect the debt directly, often through phone calls and letters. These efforts aim to recover some of the outstanding balance.

Alternatively, the original creditor may sell the charged-off debt to a third-party debt buyer. These buyers acquire accounts, often for a fraction of the original amount, and then pursue collection from the consumer. When a debt is sold, the credit report may show the original account with a zero balance, and a new collection account from the debt buyer may appear, potentially doubling the negative entries.

Debt collectors, whether the original creditor or a third-party agency, use various methods to recover the debt, including phone calls, correspondence, and legal action. The Fair Debt Collection Practices Act (FDCPA) is a federal law that regulates third-party debt collectors, prohibiting abusive or deceptive practices. This law dictates communication rules, such as limiting contact times. While a lawsuit is possible, making payment arrangements can often prevent escalation.