A “charge off” is one of the most severe credit delinquencies a borrower can receive on their credit report. While not quite as harsh as a bankruptcy or foreclosure, it is definitely in the same tier, and should be avoided at all costs.
So what exactly is a “charge off,” and why is it called such?
If a credit account is not paid on time it will eventually go into collection status. If it is not paid at that time or successfully disputed with the creditor, it will enter charge-off status, often after six months of non-payment.
It’s called a charge off because corporations file a Profit and Loss statement with the IRS each year detailing the companies profits and losses, including bad debt that is essentially charged off as a business expense. It’s very typical for large corporations to claim these losses and it’s factored in to their cost of doing business.
Charge-Offs Still Collectible
Though the amount in question is written off at the end of the tax year, it is still legally collectible, and there’s a good chance a collection agency will continue to badger the consumer for the money, or a portion of it. And if the amount is over $1,500 it’s possible that the company may pursue a lawsuit to collect the outstanding debt.
Paid Charge-Offs Will Remain on Your Credit Report
One important thing to note about charge off accounts is if you decide to pay them off, don’t be surprised if it remains on your credit report. Per the Fair Credit Reporting Act, a charge off account will remain on your credit report for seven years from the original date of delinquency. That said, don’t worry about “resetting the clock” if you decide to pay the charge off. It is less detrimental to have a paid charge off than an unpaid charge off.
If you find a charge off on your credit report, make sure you take action immediately. There are several courses of action possible.
Remove Charge-Offs
First, dispute the claim directly with the creditor. If they fail to budge, write a letter to one or all of the credit bureaus detailing the dispute (how to remove negative items from credit history). If the original creditor doesn’t respond within 30 days they will remove the item entirely from your credit report.
If you know the charge off is legitimate, work with the original creditor directly to make a deal. Don’t ever try to cut a deal with a collection agency, as you’ll surely get burned. If you work directly with the creditor you may be able to get the charge off removed from your credit report by making a partial or full payment.
But no matter what course of action you decide on, ensure you get everything in writing, and never take anyone’s word on anything!
If you have a credit report handy and think you may have a charge off, look for the number “9” next to the appropriate credit line. This is the symbol for an account in charge-off status.
Tip: A charge-off can lower your credit score dramatically, so avoid them at all costs!
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