Of the many things that can affect a consumer’s credit report and score, having one or more accounts showing as “charged off“ is among the most harmful. Consumers with charge offs on their credit report will have difficulty obtaining any new credit. And what credit they are able to acquire will come with exorbitant interest rates. Let’s take a closer look at how charge-offs affect consumer credit.
What is a Charge-Off?
When a creditor abandons efforts to collect payments on a debt, the account is considered charged off. This can happen with credit cards, mortgages and other types of consumer debt. The creditor reports it as a loss, but you are still responsible for paying the debt, usually to a debt collector.
How does a charge-off affect credit?
Once a creditor writes off the debt as a loss, they will report the charge-off to the credit reporting bureaus. It will then show up as a derogatory mark on a consumer’s credit report for up to seven years. Keep in mind, by the time an account reaches charge-off status, it will have already shown up as several months of late payments and possibly, that the account was in collections. All these derogatory marks together have a long-lasting cumulative negative effect on the consumer’s credit.
Does it mean the debt goes away?
No. The original creditor deciding to take a loss does not make the debt disappear. By law, a consumer is responsible to pay back any debt they take on until it is paid, settled or discharged in bankruptcy. Chances are, the original creditor has sold the debt to a collection agency, who will continue to make demands of the consumer to pay the debt. These demands can be insistent and, in some cases, aggressive.
Should I pay the charge-off?
Yes. Although you will likely be paying a third-party collector rather than the original creditor, you’ll still want to pay off the debt. The charge-off will still have a negative effect on your credit, but future potential creditors will look more favorably on a charged-off account that is paid than one that isn’t.
Can I dispute it?
If you find a charge-off on your credit report that you believe is an error, or if a valid charge-off stays on your credit report for more than seven years, you can contact one of the three major credit reporting bureaus to have it removed. You will need to provide documentation proving the charge off is erroneous or out of date. If the bureau agrees the charge-off is in error, they will remove it from your report and contact the other two bureaus to do that same. You should follow up with all the bureaus to ensure it does drop off the report.
Will my credit ever recover?
While a charge-off will have some immediate negative effects on credit, it’s not permanent. The charge-off will stay on your credit report for up to seven years, but by carefully managing your credit, you could see the negative effects begin to lessen in as little as two years. A number of factors go into determining your credit report and score. By far, the most important thing you can do to help your credit is to make your payments on time, every month.
If you would like help planning a budget and managing your credit card debt, our free and confidential online financial review is a great place to start.