Charge-Off

A debt that is written off as a loss because the financial institution or creditor believes it is no longer collectible due to a substantial period of nonpayment.

What Is a Charge-Off?  

A charge-off on your credit report indicates the financial institution or creditor has written the account off as a loss and has stopped attempting to collect on a debt that you owe. However, a charge-off does not mean your debt is forgiven—it may be transferred to a collection agency or sold to a debt buyer. As long as the debt remains outstanding, you're still responsible to pay it. 

How Does a Charge-Off Work? 

When you miss a payment on a loan or credit card or have a bank account with a negative balance, the creditor or financial institution will attempt to collect the amount you owe. At some point, the creditor may determine the debt is uncollectible and decide to charge it off. This means the creditor has written off the remaining balance as a loss.  

At this point, the creditor will report the account as “Charged Off” to the credit reporting agencies which will appear on your credit reports along with the account balance. If the charge-off is legitimate and you can't convince the creditor to remove it, a charge-off can remain on your credit reports for up to seven years after your first missed payment. 

Once a creditor has charged off a debt, they may decide to sell it to a debt buyer or transfer it to a debt collection agency for pennies on the dollar. If this happens, your account will be closed, interest will stop accruing on your balance, and your credit report will reflect that the account was "Charged Off." However, you will still be liable for paying off the debt to the debt collection agency. Additionally, the collection agency may report a collection account for the same debt, further impacting your credit score.

Will a Charge-Off Impact Your Credit Score? 

Your payment history is the most influential factor in your FICO credit score. Missing just one payment could have a significant negative impact on your credit score. 

If a debt balance remains unpaid long enough for the creditor to stop attempting to collect payment, the worsening delinquency and subsequent charge-off could have a long-term  and far reaching impact to your credit score.  

For example, a low credit score and history of nonpayment may make it more difficult to get approved for credit in the future. It may also impact your ability to get approved for a residential lease or to qualify for lower interest rates on auto or homeowners insurance.  

How Can You Repair a Charge-Off? 

The best way to repair a charge-off is to prevent it from happening. If you start missing payments, don't ignore the situation. Contact your lender and ask if there’s anything that can be done to help you avoid a charge-off situation. 

In the event your debt is charged off, as long as there is a balance, you’re still responsible for repayment which is why you should consider ways to pay off the debt as soon as possible to avoid having it go to collections. Even if you cannot pay off the debt in full, you may want to consider negotiating a payment settlement with the creditor for less than what you owe or, if necessary, having the debt discharged in bankruptcy.  

In some cases, you may be able to negotiate with the lender to remove the charge-off from your credit report in exchange for full payment—a process known as “pay for delete.” Even if you can't get it removed, paying off the balance could potentially reduce the impact to your credit score.  

If the creditor does sell the debt to a collection agency, you'll face more attempts to collect the amount you owe. Some debt collectors may even resort to lawsuits to force collection through a court order. 

How Can You Limit Charge-Off Damage? 

The timeframe for when a creditor decides to charge-off an account ranges from 120 to 180 days from your initial delinquency date. You'll typically receive letters and phone calls reminding you of the past-due payment, urging you to get caught up. Don't ignore the creditor—this is the best time to talk to the lender to see if you can avoid a charge-off. 

If you've had an account charged off recently, contact the creditor as quickly as possible to verify the accuracy of the account details and look for opportunities to pay off some or all of the debt to avoid transfer to a collection account and further damage to your credit score. 

In some cases, a charge-off could be reported in error. If this happens, it could damage your credit score, so you should act quickly to dispute the negative item with the credit reporting agencies. As long as the dispute isn't frivolous, the credit bureaus are required to investigate it and remove or update the information if it's found to be innacurate.  
 
To contact the credit bureaus:  

• Equifax 

• Experian 

• TransUnion 

If the creditor decides to charge-off your account, it'll only report only to the credit reporting agencies that it normally reports to. For many lenders, it's all three, but some lenders may only report to one or two of the major credit bureaus.