What Is a Charge-Off?

A charge-off is a negative entry on your credit report indicating that a creditor has written off a debt as a loss because it doesn’t believe you will repay the debt. Despite the charge-off, you’re still responsible for paying back the debt. This is considered a derogatory entry in your credit file—a serious negative event—and it can adversely affect your credit scores and your ability to borrow additional funds.

Do Charge-Offs Affect Your Credit Score?

A charge-off, by itself, may not hurt your credit scores much. However, the missed payments and negative credit report entries that precede the charge-off could significantly harm your credit. Here’s how late payments could damage your credit:

• Missed payments hurt your credit score: Your payment history is the most important factor in your credit score, accounting for 35% of your FICO® Score. Late or missing payments hurt your credit scores more than any other single factor.
• The first missed or late payment may sting the most: A payment that’s 30 days late may hurt your scores the most, and the damage gets worse each month the bill remains unpaid.
• Your credit could be damaged for seven years: Missed payments, charge-offs, and collections remain on your credit report for seven years. Their effect diminishes over time, but they can still impact your ability to get new credit in the future.

Charge-Offs vs. Collections

With a charge-off, your creditor essentially gives up trying to collect and writes the amount off as an unpaid balance. However, you’re still responsible for repaying the debt, and your creditor may sell the charge-off to a collection agency. If the collection agency reports the account to the credit bureaus, two changes will appear on your credit report:

• The balance owed on the charged-off account will change to zero.
• A new collection account will appear on your report.

The collection entry will include contact information for the collection agency. You’ll probably know about these changes long before you see a credit report because you will likely be bombarded with letters and phone calls from the collection agency.

Should You Pay Charged-Off Accounts?

The outstanding balance on a charge-off account is still your debt, and you are legally responsible to repay it—either to the original creditor or the agency that buys the debt. As long as the account entry is designated as a charge-off and displays an outstanding balance, you can contact the creditor to make payment. Doing so will change the account designation to note the charge-off as paid. Paid charge-offs are still considered derogatory entries on your credit report, but some lenders view them as less negative than unpaid charge-offs.

Can You Remove a Charge-Off From Your Credit Report?

If the charge-off on your credit report is accurate, it will be removed from your credit report after seven years. If you pay the charged-off amount, the charge-off will be noted as paid and removed after seven years. However, if you believe the charge-off on your credit report is inaccurate, you have the right to file a dispute with the credit bureaus at no cost. The credit reporting agencies will investigate your claim and if the charge-off is erroneous, they may correct it or remove it from your report.

Rebuild Your Credit After a Charge-Off

Missing payments, charge-offs, and collections can seriously harm your credit score, impacting your ability to secure new credit in the future. It’s wise to rebuild your credit to help you achieve financial goals, like qualifying for a mortgage on a new home. Here are some proven tips to rebuild your credit:

• Monitor your credit: Regularly check your credit reports and look for areas of improvement. You may find high levels of debt you could pay down or an unpaid collection account you could repay. You might also spot inaccurate information on your credit reports.
• Pay your bills on time: Your payment history impacts your credit score the greatest, so paying your bills on time is essential.
• Lower your debt balances: Your credit utilization ratio—the amount of available credit you’re using—accounts for 30% of your FICO® Score. Aim to keep your debt ratio below 30%, but the lower, the better.
• Consider getting a secured credit card: Using a secured credit card responsibly may help you improve your credit. These cards require a security deposit, which lowers the card issuer’s risk.
• Get help managing your debt: If you’re having trouble managing your debt, consider working with a credit counselor to create a workable budget and pay off debt.

Remember that rebuilding your credit takes time, so patience is key. By following these and other credit-improving tips, your credit will gradually improve over time.