Credit Report Charge-Off: What It Means & How to Remove It

Credit Report Charge Off

Every industry has a collection of terms and phrases specific to that industry, often called “jargon.” For instance, the medical profession is often considered to be awash with jargon — with terms such as infarction, puls/ox, and thrombosis — intelligible only to those with medical training.

Excepting, perhaps, the medical industry, few industries are as saturated with jargon as that of finance, which has a special term for just about everything. Indeed, for many, even something as simple as reviewing your consumer credit report can require a crash course in confusing financial jargon.

Among the commonly misconstrued bits of terminology found on your credit report are the terms “charge off” and “write off.” Referred to by a pair of seemingly innocuous phrases with the same meaning, a single credit report charge off can have big impacts on your credit. Let’s dive into the somewhat frightening world of charge offs, including what exactly a charge off is, how charge offs are treated by creditors and credit bureaus. And — some light at the end of the tunnel — how credit repair companies can help you handle charge offs.

1. A Charge Off Means Your Debt is Overdue

Despite what its name may imply, a charged off account doesn’t actually go anywhere. Instead, an account will become a charge off when it is significantly past due. For most account types, a charge off will occur after 180 days of missed payments, although installment loans can be charged off after 120 days of nonpayment.

After this time, most creditors will assume their chances of recovering the money are somewhere between zero and nil. The creditor consequently removes the account from active status and marks it as a charge off in its ledgers — and on your credit report.

For the lender, the charge-off process is basically an accounting action. Deeming an account a charge off allows the creditor to write off the loss of the debt on their taxes, rather than count it as potential income.

From the consumer side, a charge off is an extreme form of credit delinquency. However, unlike an account with a mild delinquency, such as a single missed or late payment, an account that has been charged off is considered to be bad debt. When reported to the credit bureaus, a charge off will have a significant negative impact on your credit scores.

Paying off the full amount of the delinquent debt can lessen the credit score impacts of the charge off, but will not eliminate the impacts entirely. For some, the easiest way to deal with a charged off account may be to hire a reputable credit repair company to do the legwork for you.

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2. The Original Creditor May Not Own Your Charged Off Debt

Once an account has been marked a charge off, the original creditor generally wants little to do with it. Of course, that doesn’t mean it disappears. Instead, that debt may be transferred to an internal collections department to try and recover some of the loss.

If there is no internal collections department, the debt can be sold to an external debt collections agency. These agents usually obtain the debt for pennies on the dollar because of the projected time and energy required to collect on the debt.

To determine who currently owns your charged off debt, you should check your credit reports. When an account has been moved or sold to another entity, the account will generally be marked as “transferred” on your report and will indicate the new owner.

After a written off debt is sold to a collection agency, the original account will usually be considered closed on your credit report. In this case, there will be a new entry on your report representing the active, transferred debt account, attributed to the entity that now owns the debt.

3. You Are Still Responsible for the Delinquent Debt

Regardless of where the debt ends up after the lender has written off the account, that debt still exists — and you are still responsible for paying it back. The contract you signed when you agreed to take on the debt stays in effect until your balance is settled, no matter who owns the debt or how many times it changes hands.

Additionally, the amount you legally owe on the debt doesn’t change just because a collections agency purchased the debt for less than it is worth. You remain obligated to pay what you contractually owe, which, generally, is what you borrowed minus what you already paid back, plus any applicable interest.

The first step when intending to repay your delinquent debt is to determine who owns the debt. You need to make sure you are corresponding with — and making payments to — the actual legal owner of your debt. Some disreputable agents may be inclined to accept your payments, whether or not they actually own your debt.

4. Negative Accounts Stay on Your Credit Report for 7 Years

Although few Americans have likely read it, they owe some thanks to the Fair Credit Reporting Act (FCRA). Responsible for regulating the collection, dissemination, and use of consumer information, the FCRA is responsible for, among other things, keeping your credit information in the right hands.

Screenshot of Part of the Fair Credit Reporting Act

The Fair Credit Reporting Act (FCRA) dictates how long negative accounts can remain on your credit report.

Another important section of the FCRA is the portion that addresses the length of time harmful information can stay on your credit report. Specifically, most types of negative accounts can stay on your report for up to seven years from the initial date of delinquency.

This means any charge offs — and the hefty credit score dips that accompany them — will remain a thorn in the side of your attempts to get credit for the better part of a decade. What’s more, paying off the debt will not automatically remove the charge off from your account. Instead, it is designated a “paid charge off,” which has less impact on your report but still isn’t looked on very favorably by future lenders.

On the plus side, the older the charge off becomes, the less impact it will actually have on your credit score. In fact, depending on the age of the charge off, your best bet may be to wait for it to expire and fall off your report automatically. Keep in mind that this only works if you don’t intend to make any large credit purchases, such as purchasing a new home with a mortgage loan, within the lifespan of the charge off.

5. Negotiating with Your Creditors May Speed Removal

If you are planning to purchase a home or vehicle, or make any other large investment for which you will need a line of credit, you may not be able to out-wait a charge off. In this case, you or a reputable credit repair company working on your behalf may be able to negotiate with your original creditors to have the charge off removed.

Depending on the nature of your charge off — and your personal resources — you may be able to pay off some or all of the debt in exchange for your creditor removing the charge off from your credit report. Often referred to as a “pay for deletion,” this method works best if you can offer a significant portion of your outstanding balance.

It is important to note that creditors and collections agencies are under no legal obligation to remove a paid charge off or collections account from your credit report. In fact, pay for deletion is actually frowned upon by the major credit bureaus as a violation of the creditor’s agreement to report complete and accurate consumer credit information.

That said, if the charged off account was the result of a mistake, or is, itself, an erroneous account, the creditor can request the account be removed from your report entirely. You can also petition to have any item you believe to be incorrect looked at by the credit bureaus, which are legally obligated to investigate potentially wrong accounts within 30 days after you, or your credit repair company, file the dispute.

6. Charge Offs Will Drag Down Your Credit Score

Whether you call it a charge off or a write off — or come up with some entirely new bit of fun financial jargon — the impact to a credit score of a charged off account remains the same: big and bad. A super-powered delinquency, charge offs can eat several dozen points off your credit score and the higher your score before the charge off, the larger the number of points you’ll lose.

Late Payment Categories

The best way to deal with a charge off is to avoid ever having one in the first place. Pay your credit accounts as agreed every month, and eliminate the hassle (and credit hit) altogether.

Even if you do fall behind on your payments, as long as your account has yet to be charged off — so, as long as you aren’t more than 180 days past due — you can still recover your credit score by paying your balance and returning your account to good standing.

We all have financial ups and downs, and at times may feel like just ignoring all of our debts and payments. But this will only lead to more problems in the long run. While it may seem like an insurmountable obstacle at times, working to pay any balances before that 180 day point is well worth the effort it may take.

If you’re already dealing with a charge off, you can mitigate some of the negative impacts by maintaining the rest of your accounts in good order, including making on-time payments and keeping a low utilization rate. You can also try hiring an experienced credit repair company to negotiate with your creditors on your behalf, or take the reins and try doing it yourself.

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