One Charge-off account can take up to 150 points off an excellent credit score. The higher your score was to start with, the greater the damage will be.
When an account is charged-off, it means that a creditor no longer expects to be repaid and writes off the account as a bad debt. A creditor typically waits 180 days, or six months, of non-payment before charging-off a debt.
But a charge-off does not mean you no longer owe the debt. Your creditor will add the charge-off account to your credit reports and continue to attempt to collect on the debt. Creditors may choose to handle collections in one of three ways:
- Try to collect the debt itself.
- Hire a collection agency to collect for them.
- Sell the debt to a collection agency.
7 Facts about Charge-offs
1. How many points will a credit score decrease?
A charge-off is considered a significant event with regard to your score and will likely have a severe negative impact, especially if it's a recent charge-off. If a charge-off was just added to your reports last month, the account may have a significant impact on your credit scores.
FICO, the most widely used credit scoring system says a charge-off can take up to 150 points off a credit score. The higher your score was to start with, the greater the damage will be. And, keep in mind it’s not just one credit score. Most consumers have at least 3 credit scores — One at Experian, Equifax and Transunion that will be affected.
There is some good news. As negative history grows older (and no new negative activity shows up elsewhere on your reports), its impact starts to fade. A charge-off from three years ago hurts your scores far less than a charge-off from last month.
2. Determine how long a charge-off remains on reports?
The charge-off account will be deleted 7 years from the date of the first missed payment that led to the delinquent status. It's also referred to as the original delinquency date. If a creditor transfers or sells the charge-off account to a collection agency, the original delinquency date that determines how long the charge-off remains on credit reports does not change.
Here is an example of the charge-off lifecycle:
- 1/1/18: You become 30-days late on a payment to your credit card issuer and never further payments.
- 7/1/18: At 180-days past-due, the credit card issuer closes your account and marks it as a charge-off.
- 1/1/25: The charged-off account must be deleted from your credit report by this date.
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3. Can both a charge-off and subsequent collection account appear on credit reports?
Both the charge-off account and the collection account can appear on credit reports. With both negatives on your credit reports a credit score can really take a dive. The good news is collection accounts are treated as a continuation of the original account. As a result, the original delinquency date also determines when collection accounts are deleted.
If a creditor transfers or sells the charge-off account, it does not extend how long both negatives remain on credit reports. Many times charge-off debt gets sold from one collection to another. But you should not have the same debt reported from two different collection agencies.
4. Can creditors remove charge-offs before 7 years in exchange for payment?
A creditor will typically not agree to remove an accurate charge-off from credit reports. Creditors have a contract with the credit bureaus that they will not remove negative information as a method of collecting debts. But if there are inaccuracies in the charge-off listing they can be disputed. You can always try to get a creditor to delete a charge-off as a gesture of goodwill. But they are not obligated to agree. If you get a settlement agreement with a “deletion” included you have hit a home run.
Your chances of getting a creditor to remove a charge-off may be increased if you agree to pay the charge-off in full. If you've already paid the charge-off, bombarding the creditor with goodwill requests may result in deletion. The request must be presented to someone in management for better chances.
Plus, a creditor may agree to remove the charge-off if you're currently paying other obligations on time. Creditors will sometimes look at how you're paying other bills in order to make a decision about deleting the charge-off.
The alternative would be to settle for a notation of “paid” or “closed.” The good news is once a charge-off begins to age, it will have less effect on credit scores.
5. Will entering a payment plan re-start the charge-off removal date?
Entering a payment plan will not restart the clock for removing the charge off from your credit reports. There may be a case of re-starting the clock if you opened a new account and rolled the old debt into it. Because lenders and collection agencies are required to report the original delinquency date of the debt which starts the clock ticking on the 7-year reporting period, that date cannot be changed.
The charge-off account will still be removed once the 7 years is up, even if you are now making payments on the debt. Paid charge-offs still have the same negative impact on credit scores but if you are seeking a mortgage or auto loan it looks much better to lenders when charge-off accounts are paid.
6. Will paying a charge-off increase your credit score?
Paying will not increase your credit scores. If you are facing a debt collection lawsuit, paying a charge-off can avoid legal actions. But even with a zero balance, your credit reports still show a history of late payments and the fact the account was charged-off. A FICO Score’s purpose is to help lenders predict the likelihood that you’ll fall 90 days or more behind on any credit obligation during the next 24 months.
7. Creditors can continue to update charge-off accounts
Some creditors may continue to update a charge-off account status monthly for as long as it can remain on credit reports. If the debt has been sold to a collection agency, then the original creditor should be reporting a zero balance on the account
Can you recover credit scores after a charge-off?
All is not lost when you have a charge-off account. You can recover your credit score by making on-time payments on ALL of your other accounts and simply by giving it some time. As the charge-off gets older, it will have less impact on your credit score, especially if it's outweighed by other positive information.
In a 2014 study by the Urban Institute, Delinquent Debt in America, it was found that among adults who have a credit file:
- 35% of U.S. consumers (77 million) have a debt or unpaid bill that has been sent to collections, and
- 5% of U.S. consumers have a recent debt or bill that is more than 30 days late.
Charge-off accounts should be avoided by any means necessary. It is detrimental to a credit score.
Consider a credit repair company to help remove charge-offs
While there's no guaranteed removal of charge-offs from credit repair companies, a reputable company can help you exercise your consumer rights. They can also help you prepare and submit disputes. The Fair Credit Reporting Act (FCRA) says credit bureaus must be able to verify any item on your credit report. If a dispute is submitted and your creditor can’t verify that the dispute is 100% accurate, it must be removed from your report. A charge-off isn’t allowed to remain on your report if it’s incorrect, outdated, or unverifiable.
You can always dispute charge-offs on your own, you don't need a credit repair company. But if you’re busy or overwhelmed by the process, you can hire a professional to deal with the credit bureaus and your creditors on your behalf.