One of the worst things that can happen to your credit score is a charge-off. Negative items like a charge-off indicate a very severe payment issue. A charge-off comes with another disruptive derogatory mark: payment history.
Payment history is responsible for 35% of your credit score. This is why becoming late on payments or having a past-due balance, the account ends up getting charged off by the credit card issuer. It can have a massive negative impact on your FICO score.
But how much of an impact does a charge-off have on your credit reports? How many points does a charge-off affect your credit score? How to avoid a charge-off? We’ll answer all of these questions further in the article. Before that, let me be clearer about what a charge-off is and how it affects your credit history.
What is a charge-off?
A charge-off is basically a bad debt that the creditor has given up trying to collect after the debtor fails to complete several monthly payments. Although different creditors or lenders have other policies, it’s common to get a charge-off on an account when you’ve missed at least six payments in a row.
There is a lot of confusion about what precisely a charge-off means. Many people are stuck on the idea that when their account is charged off, the creditor lets them go with the money they owe.
A charge-off does NOT mean debt forgiveness. Even when the lender charges off an account, you still owe the debt.
When you take a personal loan, auto loan, credit card debt, or owe any debt, the lender counts that debt as an asset. When the debt is in good standing, it has value. But the older the asset gets without getting paid, the less valuable it becomes to the creditor as it is less likely to be collected.
The IRS does not allow companies or creditors to count this asset forever because it has a statute of limitations, which is why it needs to be taken off records. This is when the creditor marks an account as charged-off.
A charge-off does not mean you do not owe the debt anymore. It only means that the lender is not listing that debt as an open asset. Furthermore, the lender has the right to sell your account to a third-party debt collection agency that will make attempts to collect on the unruly account. They specialize in purchasing delinquent debts at a discount and attempt to collect more than they paid for the debt.
Here’s how much a charge-off can affect your credit score.
How Many Points Does A charge-off Affect Your Credit Score?
A charge-off can easily be considered a consequential event and will likely have a very severe negative impact on your credit score. What is worse, it will remain on your credit file for 7 years. When a charge-off is recent (added to your reports last month or a few weeks ago), it can have a massive impact on your score compared to older charge-offs.
A charge-off can take up to 150 points off your credit score according to the most used credit scoring system—FICO. The higher your credit score was before the charge-off, the more damage negative accounts will have. It can take months to fix your credit score even if you pay it off.
Another part of this derogatory mark that you must know is it’s not just one score or report that gets hurt. Most consumers have at least three credit scores from three different bureaus—Experian, Equifax, and TransUnion. When your lender charges off your account, it’ll show up on all of these three credit reports.
The only fact worth knowing about a charge-off is that as negative history grows older (and if no other negative, derogatory marks show up), its impact will start to fade away.
How Long Does A charge-off Remain On Your Reports?
Like most late payments and other negative information, a charge-off usually remains on your credit reports for up to seven years, starting from the date of your first missed payment. This date is commonly known as the original delinquency date.
The original delinquency date does not change even if the charged-off account is sold to a collection agency by your creditor.
Here is a better example that describes your account’s charge-off cycle:
- 1st January 2015: You miss your first monthly payment due to some financial conditions.
- 31st January 2015: You become 30 days late on your monthly payment and never pay the further payments.
- 1st August 2015: At 180-days due or six months due, your creditor closes your account and marks it as a charge-off.
- 1st January 2023: The charged-off account must be deleted from your credit reports by this date, as it is only supposed to be on your reports for a maximum of seven years.
But keep this in mind, when your creditor sells your account to a third-party collection agency, both the charge-off account and the collection account may appear on your reports. With both of these being negative factors, your credit score drop can be significant.
Is It Necessary To Pay A Charged Off Account?
Again, a charge-off does NOT mean debt forgiveness. Unless the charge-off on your reports is inaccurate, you’re bound to pay off that debt. The first thing to do when you learn about a charge-off on your reports is to verify the accuracy.
Here are some things you may look for:
- The outstanding balance: If the due balance on your account looks more than it should be, ask your creditor to explain why. If there are no explanations for the additional cost, ask them to correct the derogatory entries.
- Collection agencies: Once your account is charged off, it could be sold to more than one third-party collection agency.
For instance, if your account has been sold to three different agencies, ensure that each sold account is marked “closed” and has a zero balance. It’s only accurate to have the most current collection account as open or active.
- The original delinquency date: The charge-off date on all of your collection accounts should be identical to the original delinquency date, i.e., your first missed payment that led to a charge-off.
If you figure out that the charge-off on your reports is legitimate, you must take action and pay it off.
How Fast Will My Credit Score Go Up?
Many people believe when they get rid of a debt, their credit score skyrockets right away. It is not that easy. Similarly, paying a charge-off altogether doesn’t remove the information that your account was charged off. Thus, it will not improve your credit score, at least not instantly.
The fact that your creditor has given up trying to collect a debt can be tempting not to pay a charge-off. But as long as you’re responsible for the debt, you need to make sure it’s …
- Discharged in a bankruptcy filing
Your credit score will start to improve over time after you get rid of the charge-off. Once you begin paying all of your accounts on time, and handle your debt like a responsible debtor you will see it rise. Paying the charged-off account will reduce your overall debt. This may boost your credit score. 30% of your credit score depends on the amount of debt you carry.
In case of an inaccurate charge-off, you should neither pay it off nor avoid it as it can stay on your reports for up to seven years. The best way to deal with it is to file a dispute on the inaccurate negative information on your creditor reports.
The credit bureaus are bound to investigate a dispute and correct or explain it within 30 days of the filing date.
Ways to Pay Charged Off Accounts
There can be more than a single way to pay a charged-off account. One of which may even help you take off this negative, derogatory mark from your reports.
1. Talk to the Creditor
Most often, charged-off accounts are passed on to a third-party debt collector after they appear on your reports. But, it is far better to deal with the original lender than a debt collector or collection agency.
A debt collector cannot make any changes to your reports, while the original creditor can. So, you should be able to convince the creditor to remove the charge-off from your reports in exchange for payment.
Although before you call them up, the first step is to ensure having enough funds to make the complete payment you owe. The more and the sooner you can pay it, the more you have chances for proper negotiation.
Speak to someone who holds the authority to make changes in your credit report. Let them know you’re interested in paying off the account in exchange for having the charged-off status removed. Keep these things in mind before hitting the creditor up:
- Speak formally and politely.
- Please do not blame the creditor or speak any ill of them.
- Do not make excuses for your repayment inability.
- Stay truthful, short, and to the point.
If you end up convincing the creditor to remove the charge-off status, something they aren’t ethically or legally bound to do, consider it a home run to get a negative entry or old debt removed. Their only obligation is to report accurate information.
If you are unable to pay the entire amount at the moment, your second best option is settling the debt.
In this case, your creditor or the collections agency will accept a lower lump sum amount than initially agreed to close an account. But you must understand that this will show up as a “settled” charge-off on your reports rather than “closed” or “paid.” It is rare to settle an unpaid debt and have them removed the delinquent account from your credit report.
A settlement can be a negative mark on your profile, but the brighter side is that creditors can not sell your debt to a collection agency anymore, and you’d be free of debt. It shows creditors that you were willing to come back and pay your debts.
3. Pay the collections agency.
If your account has been sold to a collections agency, your only option is to pay them. One thing to do is confirm you’re paying the right people, so ask for proof that they own your account.
A “paid collection” mark on your reports would seem more favorable to future lenders and creditors than an unpaid account.
Once you’ve completed the payment, get your final payment letter and keep it for proof that you can use if your reports do not update the account as paid.
How to Avoid a charge-off?
The best thing you can do to avoid a charge-off is to keep track of your monthly payments. It may be important to know the timing of a charge off. You’d be in a far better position to prevent such a massive negative impact. The good news is most creditors will tell you their time limit so you can plan accordingly. If need be make minimum payments until you get more liquid or ask if you can make partial payments.
It can be challenging to catch up again after multiple missed payments that come with added fees, charges, and interest. The more you keep falling behind, the worse your creditworthiness will get, the more ruined your financial freedom would be.
If it ever gets impossible to pay your monthly payments on time, contact your creditor and talk about your situation. They may figure out a solution for you, like a hardship payment plan. This way you can have reduced monthly payments or some months taken off your loan terms.
A charge-off can have a significant impact and be one of the worst derogatory marks to land on your credit reports. They come along with other negative information like payment history (constitutes 30% of your score). Federal Laws are there to protect consumers. You can check out the Consumer Financial Protection Bureau to see if your rights are not being protected.
A charge-off can minimize as much as 150 points from your score. This is quite a large number, given how much time it takes to build a good credit score.
It is best to keep track of your payments and handle your debt responsibly instead. Take a look at our mini-guide on “How to fix your credit” if you want to rebuild your credit score. It has excellent actionable steps that you can follow to get the financial freedom you deserve! If you are struggling to get negative information removed from your credit report you may want to look at some credit repair companies to help you eliminate the unpaid charge.