A “charge-off” is one of the most severe derogatory marks that can wind up on your credit report. While not quite as harsh as say a bankruptcy or foreclosure, it is definitely significant and should be avoided at all costs.
So what exactly is a charge-off and why is it referred to as such?
Well, if a credit card (or any other account for that matter) is not paid for a certain period, generally six consecutive months (180 days), it will eventually be closed by the creditor. At that point, the creditor will typically write off the outstanding balance as a loss and sell it to a collection agency.
The original account should be noted as “closed” on your credit report. Additionally, a collection account will appear on your report detailing the new balance owed to the collection agency, which may include fees and interest, if permitted.
In other words, you’ll have two derogatory items on your credit report, not just one. This should give you an idea of the magnitude of the situation.
Charge-Offs Still Very Much Collectible
It’s called a charge-off because corporations file a Profit and Loss statement with the IRS each year outlining 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 as a write-off, and it’s factored into their cost of doing business.
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 badger the consumer for the money, or a portion of it.
And if the outstanding amount is over a certain threshold it’s possible that the company may enlist a lawyer or pursue a lawsuit to collect the debt.
Paid Charge-Offs Will Remain on Your Credit Report
Another important thing to note about a charge-off is that if you decide to pay it off, don’t be surprised if it remains on your credit report for several years after.
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 (when you were first late).
At the same time, don’t worry about “resetting the clock” if you decide to pay the charge-off. It won’t extend the seven-year timeline and it’s less detrimental to have a paid charge-off than an unpaid charge-off, and it’s better to pay in full as opposed to settling for less than the total balance.
After all, you’ll have less outstanding debt on your credit report, which is always a good thing as far as your credit score is concerned.
Additionally, unpaid charge-offs and collections could hinder your ability to obtain subsequent loans, so it makes sense to tie up loose ends.
How to Remove the Charge-Offs
If you discover a charge-off on your credit report, make sure you take action immediately. There are several courses of action possible.
Even if you’re four or five months behind on payments, it may not be too late to call your creditor and negotiate some kind of deal.
First, contact the creditor directly to resolve the matter. If they fail to budge, you can make an attempt to dispute the charge-off with the associated credit bureaus. If the original creditor doesn’t respond within 30 days they will remove the item in question from your credit report.
If you know the charge-off is legitimate, work with the original creditor directly to make a deal. If you work with the creditor, as opposed to the collection agency, 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.