What Is a Charge-Off on a Credit Report?
Unpack the reality of credit charge-offs. Understand their nature, their significant effect on your credit, and actionable ways to resolve them.
When you use credit, you agree to repay borrowed funds. If repayment becomes difficult, it can lead to a “charge-off.” A charge-off is an internal accounting action taken by a creditor when a debt is deemed unlikely to be collected. This classification serves the creditor’s financial reporting, indicating a severe delinquency.
What a Credit Charge-Off Means
A credit charge-off occurs when a lender determines a debt is unlikely to be recovered. This internal accounting procedure removes the uncollectible debt from their active balance sheet. For revolving credit accounts, like credit cards, this typically happens after 180 days of consecutive non-payment. For other loans, such as auto or personal loans, the timeframe may be closer to 120 days.
A charge-off does not mean the debt has been forgiven. The consumer remains legally obligated to repay the full amount owed, despite the creditor writing it off as a loss. Creditors often sell these charged-off debts to third-party debt buyers, who then assume the right to collect the outstanding balance.
How a Charge-Off Affects Your Credit
A charge-off significantly impacts your credit report and creditworthiness. When an account is charged off, it appears on your credit report with a notation like “charged off” or “bad debt.” This signals to other lenders that the debt was not repaid. A charge-off can cause a substantial drop in your credit scores, potentially by 50 to 150 points, as payment history is a primary factor.
A charged-off account remains on your credit report for up to seven years from the date of the first missed payment that led to the delinquency. This presence can hinder your ability to obtain new credit, such as loans or credit cards. Lenders view charged-off accounts as a strong indicator of repayment risk, making it challenging to secure favorable interest rates or terms. This negative mark can also affect renting an apartment, obtaining certain insurance, or securing some employment.
Managing a Charged-Off Debt
After a debt is charged off, the original creditor may attempt to collect, but often sells the debt to a third-party debt buyer. These buyers acquire the debt for a fraction of its value and pursue collection. You will likely receive communications from the new debt owner. Consumers have several options for addressing a charged-off debt.
Paying in Full
One approach is to pay the full amount owed. While this will not remove the charge-off from your credit report before the seven-year reporting period expires, the status will update to “paid in full” or “paid charge-off.” This is viewed more favorably by potential creditors and can help improve your credit standing.
Negotiating a Settlement
Another strategy involves negotiating a settlement for a lower amount. Debt buyers are often willing to settle for a percentage of the original balance, typically between 30% and 70%. If you choose this path, get the settlement terms, including the agreed-upon amount and the reporting of the debt as “settled for less than the full amount,” in writing before making any payment.
Disputing the Debt
If you believe the debt is inaccurate or not yours, you have the right to dispute its validity. Under the Fair Debt Collection Practices Act (FDCPA), you can send a written request for debt validation to the debt collector within 30 days of their initial communication. This requires the debt collector to provide verifiable information about the debt. The debt collector must cease collection activities until they provide this validation.
Addressing a Lawsuit
A creditor or debt buyer may initiate a lawsuit to collect the charged-off debt, especially if it is substantial and within the statute of limitations. If you receive a summons, a legal document notifying you of the lawsuit, respond promptly within the specified timeframe, usually 20 to 30 days. Ignoring a summons can lead to a default judgment, granting the creditor rights to wage garnishment, bank account levies, or property liens. You can respond by filing an answser with the court, allowing you to present defenses or negotiate a resolution.