What is a Charge Off? | Charge Off Meaning

If you’re far behind on your debt payments, you may find that your debt has been charged off. A charge off can cause your credit score to take a hit and hinder your ability to qualify for credit cards and loans in the future. Let’s dive deeper into what a charge off is, what it means on your credit report and how one might affect you.

What is a charge off?

A charge off occurs when a lender tries to settle unpaid debt with a borrower but is unable to do so. Put simply, it’s a last resort for the lender because they have given up and accepted the fact that the borrower either can’t or won’t make any future payments towards their debt. If you receive a charge off, you should know that even though a lender has written off your debt, you’re still responsible for paying it back.

Charge offs vs. collections

Even though both charge offs and collections can hurt your credit, they’re not the same. Once a creditor has charged off your account because you’ve failed to make payments for a long period of time, the debt will usually get sold to a collection agency.

The collection agency will then work to collect the amount you owe. If this occurs, you’ll notice some changes to your credit report. The balance on the charged-off account that you owed will switch to “zero” and there will be a new entry in the “Collections” section.

What does a charge off mean on your credit report?

Charge offs are usually reported to the credit bureaus. Unfortunately, a charge off reflects poorly on your past payment history. Since payment history is 35% of your FICO score, a charge off can cause your credit score to take a major hit.

If you decide to pay the charged off account, the negative mark won’t drop off your credit history. But it will appear as a “paid charge off,” which might help your credit a bit.

How long will a charge off stay on my credit report?

Just like late payments and other negative remarks on your credit report, a charge off will remain for up to seven years. Having charge offs on your credit report can make it difficult to get approved for credit and lock in favorable rates and terms.

Can I remove a charge off from my credit report?

Depending on your situation, you may be able to negotiate with your lender to remove the charge off from your credit report. Negotiating about the charge off is worth a shot, as the worst that can happen is your lender will say no. Just realize that if you’re unable to successfully negotiate a charge off, you’ll have to wait seven years for it to fall off your report automatically.

How to pay a charge off

Now that you know what a charge off is and how it affects your credit, follow these steps to pay a charge off:

1. Figure out who owns the charge off

Before you pay off a charge off, find out who owns it. It may be the original creditor or a third-party agency.

2. Figure out how much you owe

Next, make sure you understand exactly how much debt you owe. This can help you decide how to settle the charge off.

3. Settle the charge off

If you have a small balance, you may have to pay the charge off  in full. But if it’s large, you might be able to offer 25% upfront and pay back the rest via monthly installments.

Will a charge off remain on my credit report once I pay off my debt?

Once you pay off your debt, you might expect your credit to improve right away. Unfortunately, this won’t be the case. A charge-off will still remain on your account, even when you pay it off. The good news is if you make on-time payments on all your other accounts and handle your debt responsibly, your credit will improve over time.

How to dispute a false charge off

If you find that your charge off is an error, you can dispute it with the appropriate credit bureau. All three bureaus, Equifax, Experian, and Transunion, allow you to file disputes online, by phone, or via mail. Once you send your dispute, the bureau will investigate your claim and correct or remove the charge off if it’s inaccurate.

Can I rebuild my credit after a charge off?

You can rebuild your credit score after a charge off. If you have other credit cards and loans, make it a priority to pay them on time, every time. You should also review your credit reports and dispute any errors or inaccuracies. As long as you do so, your credit score will slowly but surely increase. Just remember to be patient and persistent.

How to improve your credit after a charge off

Fortunately, you can improve your credit score after a charge off. Follow these tips to do so:

Make consistent on-time payments

Be sure to pay all your bills on time, every time. These include your mortgage, car loan, student loans, personal loans, and credit cards. Remember that even one missed payment can take a toll on your credit. Making consistent on-time payments is a great way to increase your credit score after a charge off.

Maintain a low credit utilization ratio

Your credit utilization ratio compares the amount of credit you’re currently using vs. the amount of credit available to you. If possible, keep your credit utilization under 30%. To lower it, pay down your balances early, reduce your spending, and increase your credit limit. This can also help improve your credit score after you face a charge off.

Keep old accounts open

An older average credit age can help your credit score. That’s why you should keep old credit accounts open, even if you don’t use them. If you close them, you may lower your available credit, increase your credit utilization ratio, and in turn, hurt your credit.

Limit the number of new accounts you apply for

When you apply for new credit accounts, many lenders will perform a hard inquiry. While the occasional hard inquiry is no big deal, too many of them in a short time period can damage your credit score. To improve your credit score, avoid applying for multiple credit accounts at once. This is another way you can boost your credit score after you face a charge off.