What is a charge off?

 

When you see a charge off appear on your credit report, it’s not something you should ignore. A charge off will negatively impact your credit and can stay on your credit report for many, many years. Luckily, it’s not quite as bleak as it sounds. This guide walks you through how you can contact your lenders and work with them to have a charge off removed from your account.

 

What is a charge off?

 

When you don’t pay back a debt, the lender or creditor can close out your account, mark the debt as non-collectible and claim it as a business loss on their taxes—a process known as a charge off. This doesn’t mean it stops affecting you, though, since the debt will likely be sold to a collection agency. In fact, you’re still responsible for the debt, whether by paying it off or by settling.

 

Paid off verses settled

 

You can pay off or settle your charge off. A payoff is when you contact the creditor and settle the total outstanding debt with them. Some people mistakenly think they can take care of a charge off by paying it off, but this isn’t the case. A charge off will continue to stay on your credit report whether it’s paid or unpaid.

Paying your charge off is seen as minimally beneficial as it will improve your credit score only a little. The bigger benefit is that when you apply for future credit, your lenders will be able to see that while you do have a charge off on your report, you took the initiative to pay it off.

The other option is a settlement on your charge off. In this scenario, you determine who owns the debt (original creditor or a collections agency) and reach out to them to settle. You’ll negotiate with them to pay a portion of the debt—not all—in order for them to mark it as resolved.

Once you make the payment, the debt will no longer be outstanding and will show up on your report as settled. Similar to a paid charge off, a status of “settled” won’t increase your credit score by much and won’t remove the charge off from your account (unless you negotiated a pay-for-delete). When pursuing a settlement, make sure you always get the agreement in writing.

When comparing the two options, most experts recommend you pursue a settlement because you won’t have to pay everything you owe. However, note that most lenders aren’t open to a settlement unless the debt is a few years old.

 

What does a charge off mean on your credit?

 

When an account is charged off, it leaves a negative mark on your credit report. Your credit score will likely suffer, and it’s a sign to creditors that you’re not financially responsible, which can hurt your chances of getting a loan in the future. Charge-offs show up on your credit report, so it’s important to regularly check your credit report check your credit report to stay up-to-date on your financial health.

A charge off doesn’t occur in a vacuum. Think of it this way: Your credit card bill keeps rising and you keep missing payments—as a result, interest payments pile up. Not so suddenly, it’s unmanageable, and you opt to do nothing about it. This lack of payment is recognized by your creditor as delinquency, and it doesn’t go unnoticed.

Typically after 120–180 days of no payments, your credit card company will get the message that you aren’t going to pay them back. They then sell your debt to a third-party collections agency to get rid of the account and claim the unpaid balance as a business loss on their taxes. A credit lender can also charge off payments that are below the minimum amount if the debtor doesn’t make up for them—this is also a sign of delinquency. The collections agency can then proceed to contact you in order to get the remaining debt paid.

 

How long does a charge off stay on your credit report?

 

A charge off will stay on your credit report for seven years—whether you pay off the debt or not. This doesn’t mean you should just live with the debt and wait for the mark to fall off your credit report. You’re still responsible for paying it, and avoiding it poses serious risks to you and your financial health. Even if you pay it, it will still appear on your credit report as “paid” or “settled.”

In certain cases, you may be able to negotiate with lenders to have it removed from your credit report before those seven years are up—more on that below.