What Is a Charge-Off on Your Credit Report?

A charge-off occurs when a creditor determines that a debt is unlikely to be collected. This accounting action happens after a borrower has missed several payments, signaling to the lender that the account has become delinquent. It represents an internal write-off on the creditor’s books, but it does not eliminate the borrower’s obligation to repay the debt.

Understanding a Charge-Off

A charge-off is an internal accounting declaration by a creditor that a specific amount of debt is considered uncollectible. For instance, federal regulations require creditors to charge off installment loans after 120 days of delinquency, while revolving credit accounts, such as credit cards, must be charged off after 180 days. This action allows the creditor to remove the debt from their active assets, often for tax purposes.

Common types of debt that result in a charge-off include unsecured obligations like credit card balances, personal loans, and sometimes auto loans or other consumer finance products. After a debt is charged off, the original creditor may choose to sell the debt to a third-party debt buyer or transfer it to a collection agency. These entities then acquire the right to pursue collection from the borrower, often purchasing the debt for a fraction of its original value.

Impact on Your Credit Profile

A charge-off impacts a consumer’s credit profile, serving as a negative mark. When an account is charged off, credit bureaus are notified, and the credit report status updates to “charged-off” or “written off,” indicating delinquency. This entry signals to prospective lenders that a borrower has failed to fulfill a financial obligation, making them a high-risk applicant.

The presence of a charge-off can cause a drop in credit scores, reducing them by 50 to 150 points or more, depending on the individual’s credit history. This decline is due to payment history being a major component in credit score calculations. Obtaining new credit products, such as credit cards or personal loans, becomes more challenging, and any approved credit may come with higher interest rates and less favorable terms.

Securing housing, whether renting an apartment or applying for a mortgage, can be difficult as landlords and mortgage lenders often review credit reports. Obtaining an auto loan or certain types of employment may be impacted, as some employers consider credit history in their hiring decisions. If the charged-off debt is sold to a debt collector, it may appear twice on a credit report, once from the original creditor and again from the collection agency. Even if the debt is paid or settled, the charge-off itself remains on the credit report, influencing creditworthiness for an extended period.

Managing a Charge-Off

One approach is to pay the debt. This can involve paying the original creditor if they still retain the debt, or more commonly, paying the debt collection agency that has acquired it. While paying the full amount is ideal, it is often possible to negotiate a settlement for a lower amount, especially with debt collection agencies that purchased the debt for a reduced price.

Before making any payment or agreeing to a settlement, obtain the agreement in writing. This documentation should clearly state the agreed-upon amount, the payment terms, and that the payment will satisfy the debt in full. Confirm how the account will be reported to credit bureaus once resolved. A “paid” or “settled” charge-off will still appear on the credit report, but it looks more favorable to lenders than an unpaid one, though the negative mark persists.

Another course of action is to dispute the charge-off if the consumer believes it is inaccurate or fraudulent. The Fair Credit Reporting Act (FCRA) provides rights to consumers to dispute information on their credit reports. This involves sending a written dispute to the credit bureau, which then investigates the claim with the creditor. If the charge-off is incorrect or cannot be verified, it should be removed from the report.

Credit Report Lifespan

Federal regulations dictate how long most negative information can stay on a consumer’s credit report. A charge-off remains on a credit report for seven years.

The seven-year period begins from the date of the original delinquency that led to the charge-off, not from the date the account was actually charged off. This distinction exists because the charge-off itself often occurs several months after the first missed payment. For example, if a payment was first missed in January, and the account was charged off in July, the seven-year reporting period would start from January.

While a charge-off remains visible for the entire seven-year duration, its negative influence on credit scores lessens over time. As the charge-off ages, its impact on creditworthiness diminishes compared to more recent negative entries. Once the seven-year period concludes, the charge-off should automatically fall off the credit report, and credit bureaus are required to remove it. This removal can lead to an improvement in credit scores, assuming no new negative information has been added.