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A Guide to Charge-Offs

By Janet Schaaf · March 29, 2022 · 8 minute read

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A Guide to Charge-Offs

If you’re unable to make even the minimum monthly payment on your credit card or installment debt like an auto loan or personal loan, there will be long-term effects on your finances.

If a creditor determines that a debt is unlikely to be paid after a certain amount of time, they may count it as a loss and charge off the account. But what happens after that? A charge-off on your credit report is a negative entry that can be a cause of concern for future lenders. What exactly is a charge-off, how does it affect your credit, and is there anything you can do about it?

What Is a Charge-Off?

When a credit card or installment debt goes unpaid for 120 to 180 days and the lender determines that the debt is unlikely to be paid off, the outstanding balance may be counted as a loss, and the account closed.

But a charge-off doesn’t mean the debt ceases to exist and that the borrower no longer needs to pay it off. Instead, typically the lender either hires a debt collector to pursue the money it’s owed or sells the debt to a collection agency.

Though the lender will take a hit on the money owed — the debt collector will either take a share of any funds recovered, or the bank may sell off the debt entirely to the collector at a reduced rate — the story isn’t over for the borrower.

Recommended: Debt Buyers vs. Debt Collectors

How To See if You Have a Charge-Off

Under federal law, a debt collector must send a debt validation notice within five days of first contacting you. The notice will include details about the outstanding debt, including verification that the notice is from a debt collector, the name of the creditor, the amount owed (including any fees or interest), your rights, and how to dispute the debt, and other information.

A charge-off will also be noted on your credit report. The original creditor may close your account and report the payment status as “collection” or “charge-off,” both derogatory marks on a credit report.

You can get a free copy of your credit report from each credit bureau annually via AnnualCreditReport.com. It’s a good idea to check your credit report regularly to make sure all information is up-to-date and correct. Requesting a credit report from one of the three credit reporting bureaus every few months allows you to check your credit report three times per year. For example, you could check your Experian™ report in January, your TransUnion® report in May, and your Equifax™ report in September.

Recommended: How to Read a Credit Report

What Happens When You Have a Charge-Off?

After you’re notified of the charge-off, a good first step is verifying the debt is actually yours and the charge-off is valid. You can dispute the posting with the credit bureaus and contact the creditor or debt collection agency with proof that the debt was paid if that’s the case. (Any common credit reporting errors can be brought to the attention of the reporting agency, including invalid charge-offs.)

If you do owe the debt, you have a few options for paying it, including working out a repayment plan with the creditor and attempting to come to a settlement for an amount less than the original debt.

Doing nothing at all is another option. The collection of debts is subject to a statute of limitations that prevents creditors from pursuing unpaid bills after a certain period of time (the time limit varies from state to state, but is typically between three and 10 years).

Once that statute of limitations is up, a debt collector can no longer seek court action to force repayment, but the Federal Trade Commission points out that under certain circumstances, the clock can be reset.

Again, though, simply running out the clock on a charge-off does not mean there are no consequences for the cardholder.

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How Does a Charge-Off Affect Credit Rating?

To understand the implications of a credit card charge-off, it’s worth thinking about how you’re approved for a credit card or loan.

Individuals have credit scores, which help credit card companies, lenders, and other institutions determine the risk of making payments. Credit scores are one factor among many used to evaluate an individual’s application for a car loan or mortgage — even an application for an apartment rental or new cell phone account.

Some lenders have minimum required credit scores for personal loans, so a person’s credit score not only helps to determine whether they will be approved but also the interest rate they will pay and other terms.

A credit score is a snapshot of a consumer’s financial history: their record of bill payments, how much credit they are using, and other such details.

Credit scores are built over time, reflecting years of credit habits. As such, any past credit card charge-offs are reflected in a person’s credit score and on their credit report, letting future prospective lenders know they have a history of delinquent or unpaid bills.

Recommended: What Is Considered a Bad Credit Score?

The Process of a Charge-Off

While parameters for a charge-off vary from lender to lender, here’s what typically happens: After an individual does not pay at least their credit card minimum payment for six consecutive months, the account becomes delinquent. After the first month of delinquency, the credit account is moved from the “Accounts in Good Standing” section of their report to “Negative Items” or “Negative Accounts,” along with the outstanding balance.

If the credit card company decides to charge off the debt at 180 days, this is then noted on the person’s credit report as a charge-off.

Even with a charge-off, the outstanding balance will remain on one’s credit report (noted as a charge-off), unless it is sold to a collection agency. In that case, the balance reverts to zero but the charge-off remains.

Consequences of a Charge-Off

A charge-off stays on a person’s credit report for seven years from the first delinquent payment date, usually, even if they pay off their debt in full or the statute of limitations runs out. In fact, once consumers have a charge-off on their record, it can be difficult to have it reversed.

Among the consequences of having a charge-off on a credit report: It could result in higher interest rates on future lending products, or even being turned down for a credit card or loan.

There are a few scenarios where cardholders might be able to have a charge-off taken off their credit report. If an individual can prove that the charge-off was inaccurate, they can apply to have it removed under the Fair Credit Reporting Act. It can also be helpful to reach out to the creditor directly to try to reach a resolution.

It may be possible to have the charge-off removed as part of a debt settlement agreement or on a goodwill basis in the event of personal hardship or an honest mistake — though there are no guarantees.

What You Can Do About a Charge-Off

Paying off the charge-off or collection may reduce the negative impact on a credit score. It may also be wise to contact the lender to discuss a payment settlement, which may also reduce the credit impact.

If a credit card account is charged off, it may continue to accrue interest until it is paid. Once the balance is finally paid off in full, it will be noted on the individual’s credit card report.

A credit card charge-off on a credit report can make anyone’s financial life more difficult, so prevention may be the best bet.

Contacting the creditor to arrange a payment plan could be an option to keep a charge-off from being reported on your credit report. Switching to a lower-interest credit card or consolidating debt with a credit card consolidation loan may be steps to consider for managing debts before a charge-off affects a credit report.

Developing habits for using a credit card responsibly by setting a budget and ensuring that there’s enough money on hand to cover necessary and discretionary purchases, keeping a close eye on credit card statements, and adhering to payment schedules is a good way to successfully manage your finances. Even if you can’t afford to pay the balance due in full, it’s a good idea to pay at least the minimum, on time.

Disputing a Charge-Off

If you’ve determined that the charge-off is not accurate — whether the debt doesn’t belong to you, the amount is incorrect, or the statute of limitations has passed — you can begin the dispute process.

You can begin by filing a formal dispute with the credit reporting bureau. You can mail a dispute form to each bureau or use their online dispute filing process at the following links:

•   Equifax

•   Experian

•   TransUnion

Each credit bureau has its own process for handling disputes, but generally, you can expect a reply within about 30 days. You’ll be able to check the status of your dispute online after setting up an account with the credit bureau.

The credit bureau will begin by contacting the creditor, e.g., the credit card issuer or the lender, requesting them to check their records. If the information that was reported was incorrect, your credit report will be corrected, while any correct information will remain on your report.

After a dispute is completed, the credit bureau will update your credit report with the final outcome, whether that’s deleting the disputed item or leaving it on your credit report because it was found to be a valid debt.

Paying Off a Charge-Off

If the charged-off debt is yours, you are legally responsible for paying it. You have some options for doing so.

If the original creditor has not sold the debt to a collector, you can work directly with them to pay the debt. If the debt has been sold to a collections agency, you’ll be working with the agency instead of the original creditor.

In either case, you can make a payment plan to pay down the debt, or you could also try to negotiate a settlement for less than the amount owed if you’re able to pay some amount in full.

A paid debt will be reported as “paid collection” on a credit report, and a settled debt will be reported as a “settled charge-off.”

After the debt is paid in full, asking for a final payment letter is the way to have proof that the debt is no longer outstanding.

A debt being charged off and a debt being sent to collections are related, but different. Here’s a comparison:

Charge-Off

Collections

The creditor removes the debt from its balance sheet because they deem it unlikely to be paid. The creditor hires a debt collector to attempt collection or sells the debt to a debt collection agency.
Collection attempts may still be made by the original creditor. Collection attempts are made by the debt collection agency.
Creditor will report the charge-off to the credit bureaus. Debt collectors must send a debt validation notice within five days of first contacting you about the outstanding debt.
You may be able to work with the original creditor to pay down the debt. Any payment arrangements or settlement negotiations will be with the collection agency.

The Takeaway

A credit card charge-off may remain on a credit report for years, so preventing a charge-off by developing responsible spending habits, consolidating debt, or trying to arrange a payment plan may be the best bet.

A debt consolidation loan is a personal loan used to consolidate multiple high-interest debts into one with a lower interest rate or with more manageable monthly payments. With fixed rates, no fees, and varying terms to fit many budgets, SoFi Personal Loans can be one option for managing debt.

Learn more about SoFi Personal Loans for debt consolidation.

FAQ

Is paying off charge-offs a good idea?

It can be a good idea, depending on the age of the debt. If the debt is old and beyond the statute of limitations for collection, making a payment on the debt could restart the clock on a time-barred debt.

What is a charge-off vs collection?

A charge-off happens when a creditor deems it unlikely that a debt will be paid. Collections are the next step in the process, whether the original creditor attempts to collect the debt or the debt is sold to a debt collection agency.

How does a charge off affect your credit score?

A charge-off is a derogative entry on your credit report and can negatively affect your credit score. It can affect your ability to qualify for future loans, your rental options, and even car insurance rates.


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