Have a charge-off on your credit report? This is probably one of the most misunderstood statuses on our credit reports. So, today, we’re here to make sense of account types and provide solutions for tackling them.
Ready? Let’s get started 🙂.
What is A Charge-Off?
An account is considered ’charged-off’ if you’ve missed several monthly payments and the creditor will write your debt off as a loss. That loss is a ‘charge-off. Once this happens, your credit reports will be updated to reflect the change on your account. This credit report is considered negative and will result in your credit scores decreasing.
Despite what the term suggests, a charge-off does not mean your debt is gone or forgiven. You're still legally obligated to pay. A charge-off simply means the lender moved your debt from the ‘will pay’ column to the ‘will not pay in a timely fashion or at all’ column (and it’s an IRS requirement).
How Does a Charge-Off Occur?
Most creditors don't rush into charge-offs. Generally, your account needs to be around 180 days (or six months) past due. During this period, the creditor will likely reach out multiple times via phone, email, mail, and/or text message, urging you to make payments.
Why Six Months Matter
This six-month period is a crucial window for you to take action. Every missed payment gets reported to the credit bureaus, increasingly reducing your credit scores. Taking action before the charge-off can save you from years of credit-related challenges.
How Charge-Offs Affect Your Credit Report
Charge-offs will appear as a negative item on your credit report. This will affect your ability to borrow money, obtain additional credit, and may cause your other creditors to reduce your credit card limits or close your account altogether.
A charge-off can remain on your credit report for up to seven years. During the first two years, it will weigh your scores down the most; however, it will affect your credit for the entire time it’s been on your credit report.
When Your Debt Moves to a Collection Agency
Your original lender may sell your charged-off debt to a collection agency, which will then attempt to recover the amount you owe.
When dealing with collection agencies, arm yourself with knowledge. Verify the debt, understand your rights, and consider seeking professional advice to navigate the situation.
Disputing a Charge-Off
If you believe that the charge-off is an error or that there is an error in the way it is reporting on your credit report, collect all relevant information, like statements showing payments made, as evidence; it may come in handy later.
Send off a dispute letter to the credit bureaus to update the error; they will contact your creditor. If the error is not corrected or the account is not completely removed from your credit report, you should initiate a dispute directly with your creditor.
Remember to maintain a detailed record of all communications and transactions related to the disputed charge-off. This will strengthen your case if you need to escalate the dispute.
The Power of Partial Payments
Creditors often prefer a partial payment to writing off the entire debt. This is when they will accept a portion of the debt and forgive the rest, also known as a “settlement.”
This provides room for negotiation.
If you decide to negotiate, ensure that every agreement is documented. Oral promises are not legally binding, and you'll want a paper trail. Try to get the lowest payoff amount possible. You may want to see if they would agree to remove the charge-off notation from your credit report as well.
Rebuilding Your Credit Score
Start with Basics
Regular, on-time payments and reducing your debt load are essential first steps in rebuilding your credit. Consider tools like secured credit cards as a way to re-establish a good credit history.
Keeping an eye on your financial statements, setting up payment reminders, and creating a realistic budget can help you avoid a charge-off in the first place, in addition to proactive communication. If you know that you will not be able to make a payment, call your creditor to see if they have any hardship programs that you can take advantage of.
Being that many creditors prey on consumers with less than perfect credit, if life happens and you know that you will not be able to pay off your debt, a charge-off is inevitable. However, it’s not permanent. You can always rebuild your credit.
The Importance of Patience
Recovery isn’t overnight and the time it takes to rebuild can vary from person to person, depending on their financial situation and the types of accounts currently reporting on their credit reports. The key is to have a strategy, be patient, stay committed, and track your progress. Consistent effort will yield results.
There you have it! You are now more knowledgeable about charge-offs.
Remember, charge-offs can be a challenging obstacle in your financial journey. However, with the right strategies, it’s not insurmountable. Your credit can bounce back. Keep these insights in your financial toolkit as you continue building your path to monetary wellness.