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What is a charge-off on a credit report?
A charge-off is a mark that appears on your credit report after your account has been delinquent for a long time (usually 120 days for loans and 180 days for revolving credit). When your creditor charges off your debt, they’re indicating that they no longer expect to collect it, and plan to write it off as a loss. 1
When an account is charged off, it changes from an “account in good standing” to a “negative account” on your credit report.
How does a charge-off affect your credit?
Getting a charge-off requires months of missed payments, which means your credit score will have already taken several hits. The charge-off itself will also damage your credit.
A charge-off is worse than a late payment. In fact, it’s one of the most damaging things that can happen to your credit. Exactly how many points you’ll lose when you get one depends on which scoring model your lenders use, the number of other charged-off accounts you have on your credit report, and how high your score was to begin with.
According to VantageScore, if you have relatively good credit, then a charge-off could cost you 60–130 points. Conversely, if you’re starting off with fair or bad credit, then you might lose about half as many points because negative marks are less harmful if your credit score is already somewhat damaged. 2
In addition to dropping your credit score, a charge-off will have an impact on your eligibility for new credit. Future lenders and creditors will be able to see the charge-off on your credit report and they’ll consider it a sign that you might not repay your future debts, which will make them less likely to extend credit to you.
Should I pay charged-off accounts?
A charge-off doesn’t release you from your legal obligation to repay your debt, so you should still pay your balance if you can.
The only exception is if the debt is very old, in which case you might want to first check whether it’s nearing its statute of limitations. Once your debt reaches its statute of limitations (which usually takes 3–6 years, depending on your state), it becomes “time-barred debt” and you can no longer be forced to pay it. 3
Bear in mind that until the debt becomes too old to collect, leaving it unpaid could lead to accumulating interest fees and even potential lawsuits from your creditor or debt collectors.
If your creditor has sold your debt to a collection agency, then you’ll need to pay them instead. Although paying off a collection account won’t always improve your credit score, it will change the status of the account on your credit report to “paid charge-off” or “paid collection,” which looks better to lenders than unpaid collections.
How long does a charge-off stay on your credit report?
Charged-off accounts will stay on your credit report for seven years. In accordance with the Fair Credit Reporting Act, credit reporting agencies are not allowed to report charge-offs (or most other negative information) once seven years have passed since the most recent activity on the credit account in question. 4
How to remove a charge-off from your credit report
Depending on your situation, there are two ways you can get a charge-off removed from your credit report:
Disputing the charge-off on your credit report
If you believe an account was listed as a charge-off by mistake, then you can file a dispute by writing a dispute letter to your creditor or to the three major credit bureaus (Equifax, Experian, and TransUnion). You can also dispute any charge-offs that remain on your report after seven years.
Removing a charge-off from your report is difficult. However, it’s well worth doing. In the best-case scenario, you could immediately improve your credit score by 100 points or more.
Pay for delete
If a charge-off is legitimate, then the only way to remove it from your credit report is by asking your original creditor to remove the closed account from your credit report in exchange for payment of the debt. This is a negotiation technique known as pay for delete.
This is something you have to actively pursue; simply paying your balance won’t automatically remove the charge-off from your credit report. When you negotiate pay for delete, you’re offering to pay your debts if and only if your creditor agrees to remove the negative mark from your report.
It’s worth noting that pay for delete doesn’t always work because your creditor is under no obligation to agree to your request. With that said, the worst they can do is say no, so there’s no harm in trying.
Can I delete a charge-off by paying it?
As mentioned, unfortunately, paying off the balance on a charge-off won’t get it deleted from your credit report and won’t be enough to get your credit score back to where it started.
However, like most information shown on your credit report, the effect of a charge-off will gradually diminish over time. It will completely fall off your report after 7 years, after which it cannot possibly affect your score.
Note that you can avoid incurring a charge-off in the first place by paying off the account immediately after your creditor closes it (but before they write the debt off as a loss). You should always pay off closed accounts right away if you’re financially able to do so. If you delay and your creditor charges off the debt, it will be too late to avoid the hit to your credit.
Charge-off vs. collection accounts: what’s the difference?
The difference between a charge-off and a collection on your credit report is a matter of whether your creditor has transferred or sold your debt to a debt collection agency.
A charge-off indicates that your original creditor has judged that the debt is uncollectible. It doesn’t necessarily mean that they’ve sent the debt to collections yet, although in most cases they’ll do that eventually.
When a collection agency buys or receives your debt, your credit report will be updated to show that you no longer owe a balance to your original creditor, although the account with them will remain on your report. A collection account under the agency that bought your debt will also appear on your credit report.
Needless to say, because charge-offs and collection accounts are both so damaging to your score, you should avoid them if at all possible. If you’re struggling to keep up with your credit cards or loan payments, look into credit card debt forgiveness options and other strategies for getting out of debt.