What Is a Charge-Off and How Do You Handle Them?

If you are behind on your credit card payments, you might find that you have a charge-off. Having a charged-off debt can lead to a major credit score drop so if you have one on your credit report, it is best to learn how to take it off and have your credit back on track. We will explain what a charge-off is and how to handle them.

What Is a Charge-Off?

A charge-off shows up on your credit report when you do not pay the full minimum payment on a debt for several months. This can happen with a personal loan, credit card, or another debt that you failed to pay off. The creditor then writes it off as bad debt meaning that the company gave up on hoping that you will pay back what you borrowed. The creditor closes your account and is charged off as bad debt. Having an account that is charged off as bad debt can have a negative impact on your credit score.

How a Charge-Off Affects Your Credit Score

When you receive a charge-off, it shows up on your credit report causing your credit score to take a hit. The damage on your credit score depends which credit bureau updates your report and how high your score is at the time the charge-off was assigned to you.

A charge-off can stay on your credit report for at least 7 years. Even if you do end up paying off the entire balance of your debt, it will not remove the charge-off. There is nothing you can do to remove it unless you can prove that there was a mistake and it is inaccurate. This can affect your chances of getting approved in the future for a small business loan or a business credit card.  Lenders look at your credit score to determine how creditworthy you are and use it to make their decision of approving you for a loan or not. A high credit score and a long credit history indicates you can view make timely payments and are able to stick to the terms. It will be more difficult for you to borrow if you have a low score.

You should do your best to pay off all the debts that you owe but paying off charge-offs will not benefit your credit score much. Over time the negative impact to your score will ease and will recover.

How to Dispute a Charge-Off

If you find that on your credit report you have a charge-off, but it is inaccurate, you can contact credit bureaus to dispute the entry. You will need to have the necessary documentation to prove that it is inaccurate, and they will correct the entry and let the other nation credit bureaus know so they can correct their records as well.

It is recommended that you pay your bills on time each month so you can avoid getting a charge-off. If you have not done so yet, set up auto payments so that your payments can be made in a timely manner which will help you to avoid getting a charge-off.

If you do have a charge-off on your report but it is accurate, there are a few ways you can pay a charged-off account.

  • Work with the original lender and pay back the debt if the debt has not been sold yet to a collection’s agency. As soon as it is paid off, the lender will change the status of the account saying it the charge-off has been paid and your balance will be zero. A paid off charge-off is seen more favorable than a debt that is unpaid.
  • If you negotiated a settlement and the lender accepts less money than agreed, it will appear on your credit report as a “settled charge-off”. This will not be sent to collections but can negatively affect your credit score.
  • If the creditor has sold the account to a collection’s agency, then you would pay the agency. When the debt is paid off, it will appear as “paid collection” on your report which is better than having an unpaid account.

The Bottom Line

The best thing you can do to avoid getting a charge-off on your credit report and have it negatively affect your credit score, is to ensure that you are paying all you accounts and that they are never late. This way you do not have to worry about waiting years for your credit report to recover.