What Is A Charge-Off And How Does It Affect Your Credit?

When a borrower misses payments on a loan, their account can become delinquent and their lender or creditor will attempt to collect the outstanding debt. After a certain amount of time, a creditor may mark the unpaid debt off as a loss, or a “charge-off,” and consider the debt uncollectible. A charge-off on your account can have serious ramifications for your creditworthiness.

Let’s take a deep dive into what a charge-off is, the ways a charge-off can affect your credit and how to best avoid one.

When you have a charge-off, meaning your lender or creditor writes your unpaid debt off as a loss, your account is effectively closed to any future charges. This doesn’t mean you’re free from your debt, though. After a charge-off, your debt may be handed off to a debt collection agency that will then attempt to collect the amount you owe. Your creditor may even sue you after issuing a charge-off.

A charge-off typically happens after 6 months of missed or late payments, prior to which a lender would likely attempt to notify the borrower of the delinquency via calls, emails or other means of contact. However, the timing of the charge-off can vary depending on your lender, creditor or credit card issuer.

Debt that’s charged off or sold to a debt collector is marked off as “bad debt” by the original creditor and counted as a loss for tax purposes.

A charge-off is reported to at least one of the three main credit bureaus (TransUnion®, Equifax® and Experian™) and appears on your credit report as a loan default – it may even appear twice if both your original creditor and the debt collector report it.

Having a charge-off on your credit report will cause a drop in your credit score, which, after a number of missed or late payments, may already have been significantly lowered. A charge-off can remain on your credit report for 7 years, even if you end up repaying the debt, and it signals to any other potential lenders that you’re a high-risk borrower.

In addition to damaging your credit, a charge-off can result in litigation against you. Creditors can sue borrowers over charged-off accounts up to their respective state’s statute of limitations, which in most cases is 3 – 6 years from the date of your account’s delinquency.

As mentioned earlier, a charge-off doesn’t absolve you of debt responsibility. Here are some ways you can approach a charged-off account and possibly escape further damage to your credit.

Dispute The Charge-Off

Credit reporting errors are relatively common, which is why it’s important to check your credit report at least once a month. If you believe a charge-off was made in error, you’re within your rights to dispute it with the credit bureaus and open up an investigation. You should notify the original creditor of your dispute and begin gathering documentation that supports your cause. This may include proof of payments made or evidence of identity theft.

If you’re contacted by a debt collector, you have 30 days to dispute the charge-off before it’s considered valid.

Negotiate A ‘Pay-For-Delete’ Agreement

If a charge-off is valid, you may have some negotiating options. For example, you can request a “pay-for-delete” agreement, wherein you agree to pay all or part of your owed balance in exchange for the charge-off being removed from your account.

If the creditor or debt collector agrees to this, make sure you get the agreement in writing in case you need proof to show credit bureaus at a later date.

Try Settling The Debt

You can try to negotiate a settlement with the original creditor or debt collection agency. Unlike debt consolidation, debt settlement allows you to negotiate a lower amount owed on a debt. A settlement is never guaranteed, though, and working with a settlement company can cost you in fees as well as more missed payments.

Consult Credit Counseling Services

Credit counseling can be an option for those who need help managing debt, including charge-offs. Many credit counseling services are free of charge and can point you in the best direction for debt relief, but bear in mind: Counselors can only advise you on how to proceed, not aid you directly.

Pay Off The Debt

If the charge-off wasn’t in error and you’re unable to negotiate or settle, your best option is to pay off your debt as your financial situation allows. A charged-off account that’s been paid is typically viewed more favorably by future lenders and creditors, so it can be better to pay it than do nothing. Sometimes a creditor or debt collector will grant you a payment plan to repay the debt in installments.

But, as mentioned, repaying a charged-off account won’t remove the charge-off from your credit report, and it can remain there for 7 years.

Seeing how a charge-off can complicate your financial matters, it’s best to avoid a charged-off account in any way possible. Consider the following strategies to steer clear of having a charge-off on your credit report.

Communicate With Your Creditor

Debt can change throughout its term. Maybe you refinanced a loan or made adjustments to your payment plan. Make sure your lender or creditor has the most up-to-date information on your debt, or your account might be charged off in error.

If you fear falling behind on your payments, contact your lender and see what they can do. It’s better to let them know before you miss a payment so you can possibly stay in good standing with your creditor.

Address All Attempts At Contact

Since your lender or creditor will typically attempt to notify you about a delinquency, make sure you acknowledge all letters, emails, phone calls and other attempts at contact so you don’t miss any warnings. You can sometimes avoid a charge-off by keeping in touch with your creditors.

Pursue Debt Consolidation

Juggling multiple credit card debts can make it easy to fall behind on one or more payments, so some borrowers turn to debt consolidation to simplify their debt. You can consolidate your debt by taking out a loan to pay off your various balances, leaving you with just one monthly payment and possibly a lower interest rate than you were paying before.

Options for debt consolidation include:

• Personal loans
• Home equity loans
• Balance transfer credit cards

Review your personal financial situation to decide on your best next step. Personal loans are often unsecured and can offer competitive interest rates based on your credit score. If you have good or excellent credit, you may qualify for a lower rate on your new loan.

Falling behind on debt can seriously hurt your credit, and a charge-off on your credit report can be an especially painful blemish. Approach a charged-off account in the way that best suits your situation, be that disputing the charge-off or paying it off. Better yet, take steps to avoid a charge-off if you think you’re at risk of one.

Think debt consolidation could ease your debt burden? See your personal loan rates today and start an application with Rocket Loans℠.