Is There a Charge-Off on Your Credit Report? How to Deal With It
If you don't pay your debt for sometime, you could get a "charge-off." What does a charge-off on a credit report mean? Here's how to deal with it.
July 7 2022, Published 1:58 p.m. ET
Your creditworthiness and credit score are important since they dictate the decisions of a number of lenders. Your credit score is important for buying a home, a car, or any other type of loan. However, there are a few things that you can do to really hurt your score. A charge-off could have a negative impact on your credit score. What does a charge-off on a credit report mean?
A “charge-off” on a credit report means that the lender or creditor has written off your loan account as a loss, and the account is closed to future charges.
When does a charge-off occur?
A charge-off occurs when the lender assesses the debt as uncollectible. This is usually after 120–180 days after your account becomes delinquent, which means the time it has been in arrears. In such a case, the lender could sell your account to a debt buyer or a collection agency. However, that doesn’t mean that you're off the hook.
You're still obligated to pay the debt. If the debt has been sold to a third party, you might have to pay them rather than the original lender. The new party has the right to even sue you for the unpaid debt. How long a creditor has to sue you for bad debts can depend on state law.
A charge-off can also occur if you're making periodic payments but if they're constantly falling below the monthly minimum payment and as a result your account becomes delinquent.
A charge-off can impact your credit score.
Like any other late payment or payment default, a charge-off generally remains on your credit report for a period of up to seven years. A charge-off means that you haven't been able to honor your financial commitment, which is obviously negative for your credit score. In fact, a charge-off could be extremely damaging to your score and could significantly impact your ability to borrow in the future. If the charge-off is followed by a lawsuit and a judgment, your score could fall more.
The bad news is that even if you pay the overdue debt, the charge-off status won't be removed from your credit report. The status will be changed to “charge-off settled” or “charge-off paid.” Some credit scoring models, for example, VantageScore, don’t include zero-balance charge-offs in your credit score calculation.
Can you remove a charge-off?
Generally, it's difficult to remove a charge-off on your credit report. If you believe it was a mistake, you can start a dispute investigation online with the credit reporting agency. If the charge-off is correct, it's rare to remove it from your credit report. Sometimes you can negotiate a repayment plan and the removal of a charge-off.