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A charge-off is an unpaid debt that a bank or lender writes off as a loss, because it no longer expects to be able to collect the money. The creditor may sell the debt to a collections agency, and you will still owe the money. If there is a charge-off in your credit history, that can have a negative impact on your credit score. and affect your chances of being approved for other types of credit.
There are different ways to handle charge-offs based on your financial goals. If you want to know more about charge-offs and how to handle them, here’s a quick guide that can help.
How a charge-off works
A charge-off is a debt that a lender has deemed uncollectible and has written off as a loss. Generally speaking, a charge-off appears on your credit when you have been late on your debt for an extended period of time. For credit cards and other revolving credit accounts, the period of time is 180 days past the due date. Installment loans are charged off within four months, or 120 days past the due date.
A charge-off can have a negative impact on your credit score and could stay on your credit report for up to seven years.
What happens with charged-off debt?
Keep in mind that a charge-off doesn’t mean that you are still not responsible for a debt. In fact, you’re still responsible for paying off charged-off accounts unless you have settled them with the creditor, or discharged them through bankruptcy.
Each state has a statute of limitation that dictates how long a creditor can sue you for a debt. The statute of limitation ranges from three to 15 years, depending on your state and the type of debt. Again, you will still owe this debt, but you should not be able to get sued in court. If someone does sue you, you’ll want to show up and use the statute of limitations as a defense.
Even if the original creditor decides not to sue you for a debt, they can attempt to collect it or sell it to a third party, like a debt collection agency. Debt collectors will typically pay pennies on the dollar for these charged-off accounts. If they can get you to pay, they’ll make a profit.
In some cases, these debt collectors can engage in aggressive practices like sending you letters, making incessant phone calls or even attempting to get a judgment in order to garnish your wages.
If you are feeling threatened or harassed by a debt collector, check to make sure that they are following the laws laid out in the Fair Debt Collection Practices Act (FDCPA). For example, debt collectors cannot call you before 8am or after 9pm. However, you should still pay off the debt as soon as you can.
How does a charge-off affect your credit report?
It’s important to know what could happen to your credit if you don’t pay the money you owe on a charged-off account. If you don’t pay the original creditor before the debt is charged-off, your debt can be sold to a debt collector, which means it could appear twice on your credit report.
A charge-off can lower your credit score by 50 to 150 points and can also look very bad on your credit report. It signals to potential lenders that you could skip out on your debt obligations for extended periods of time. It also shows that you may never pay debt off if the charge-off remains unpaid.
Even if you pay the charged-off debt, it won’t be removed from your credit report. Instead, it will be marked as a paid-off charge. Paying it off may improve your credit score. You can only get a charge-off removed from your credit report if it was put there in error. However, it will automatically fall off your report seven years after the first date the account is reported as delinquent.
What to do if you have a charge-off
If you discover a charged-off account on your credit report, here are the steps to handle it:
Validate the debt
Contact the original creditor and ask them to verify the debt. If the account has been handed over to a debt collection agency, ask them to show proof of the original debt. Ensure all of the information is accurate such as the amount owed, account number, dates and personal information tied to the account.
Dispute any inaccurate information
Inform the original creditor or debt collector of any information that isn’t correct. Federal law allows you to initiate a dispute with the credit bureaus’ reporting information you believe to be inaccurate.
Be ready to hand over supporting documentation that backs your claim regarding the erroneous information. This might include original invoices, account statements or contracts.
Pay off or settle the debt
If the charge-off account shows a balance, you should try to pay it off or see if the creditor will settle the account for a lower amount than what you owe. In some cases, you may be able to negotiate pay for delete. Pay for delete means that the creditor will remove the debt from your credit report once you pay it off.
If you get the creditor to agree to pay for delete, make sure you get the details in writing so that the company abides by the arrangement and actually removes the item. Understand that creditors are under no obligation to grant these types of requests and, in fact, are not doing it as much because it’s technically unlawful to remove accurate information from your credit report.
If you can afford to, paying off debt is better for your credit. Fully paying the delinquent account looks better on your credit report than settling it for a lesser amount than what is owed. If you can’t pay the full amount, settling the account for less is better than letting it remain unpaid.
Tips to avoid charge-offs
The best way to avoid charge-offs is to pay your debts on time and as agreed. Creating a budget and putting your bills on autopay can be a great way to keep your bills current. If you can’t afford to pay your debts right away, contact your bank or creditor and ask if you can come up with a payment plan or ask for a lower interest rate. Your bank might be willing to work with you if you’re operating in good faith and trying to pay what you owe.
You can check your credit report for free at www.freeannualcreditreport.com. You can request your credit report from all three credit bureaus once a year through this website.
Finally, consider a credit monitoring service that alerts you of new activity and changes on your credit report. Many major credit cards offer this service at no additional charge. Each of the three credit bureaus, Equifax, Experian and TransUnion, also offer credit monitoring products with add-ons that protect your identity and scrub your personal information from public “people search” sites.
Address the problem right away
If you ever discover a charge-off on your credit report, you should take steps to address it right away. This may include verifying or disputing the account. Paying it won’t remove it from your credit report, but may still improve your credit score. After seven years, the charge-off will no longer show up on your account.
Frequently asked questions (FAQs)
How do I remove charge-offs from my credit?
If the information is not accurate, you may dispute it with all three credit bureaus to have it removed. If the charge-off information is correct, you should pay it so that it’s updated as a paid account. It will still show up as a charge-off, but a paid charge-off. Another option is to negotiate a pay-for-delete arrangement or pay it and wait the rest of the seven years until it no longer shows up on your credit report.
Is a charge-off worse than a collection?
A charge-off can impact your credit more than a collection because you can have negative information on your report from both the original creditor and the debt collector that buys the debt, which can lead to you having both a charge-off and a collection on your credit report.
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