Ideally, you’ll never have a charge off on your credit reports. However, if you miss too many payments, you might end up with one. Charge-offs significantly harm your credit score, and dealing with them can be confusing.
But what exactly is a charge off? Can you get it removed? How much does it harm your credit score? Do you need to pay it off? Answers to these questions, and more, are explained below.
What is a Credit Card Charge Off?
Credit card charge-offs occur when a consumer stops making card payments for six months or more. After a credit card account becomes that truant or past due, the card issuer declares that the consumer has a low likelihood of paying off the debt.
This declaration, which shows on your credit reports, is called a charge-off, and consumers are still legally responsible for the charged-off debt.
What Happens if a Credit Card is Charged Off?
If you have a charged-off account, it will show up on your credit reports and lower your credit score. Having charge-offs on your account can make it extremely difficult to get approved for a mortgage, an auto loan, beginner credit cards or credit cards with low-interest rates, and more.
The credit card issuer has two main options: continuously try to get you to pay off your bad debt or sell your credit card debt to a collection agency.
What Does a Credit Card Charge Off Mean for Your Credit Report?
A charge off will show up on your credit history for up to seven years from the first missed payment. It remains on your account regardless of whether you have paid off the debt or not, unless you make a deal (more on this later).
However, paying it looks better to lenders than leaving it unpaid. A charge-off is considered a derogatory mark on your credit report, and it will substantially harm your credit.
How Does a Charge Off End Up on Your Credit Reports?
One or two late or missed payments won’t result in a charge-off. It takes at least six months of delinquent payments (sometimes up to a full year) before creditors mark the debt as a charge-off.
The creditor reports these to credit bureaus, which in turn note the charge-off in your credit reports. Rather than being listed as an “Account in Good Standing,” your charge off will show on your credit report under “Negative Items” or “Negative Accounts.”
How Bad is a Charge Off on Your Credit Score?
Charged off debt can significantly damage your credit rating. When you first started missing payments, your credit score likely already took a substantial hit.
The most crucial factor for your credit score is your payment history and whether or not you make payments on time. Missing payments, especially several in a row, has a notable impact on scores.
A charge-off affects your score even more because it is a derogatory mark. Higher credit scores are affected more significantly than low credit scores.
A credit score might drop anywhere between 60 to 150 points after a charge-off shows up on your credit report. Fortunately, the negative mark will matter less as it ages.
When Will a Creditor Report Your Activity to Credit Bureaus?
At the end of each billing cycle, creditors typically report your credit card activity to the three major credit bureaus (Equifax, Experian, and TransUnion). Billing cycles are between 28 to 31 days.
As soon as you have missed payments, it shows up on your credit reports as such. After about six months of missed payments, creditors will create a charge off. If you pay a charge off, it changes the status to paid.
However, even when you pay charged off debt, it remains on your credit reports for up to seven years from the date of the first missed payment, unless you can make a deal to get the derogatory mark removed.
Should I Pay Off Charged Off Accounts?
Whether or not you should pay a charge off account depends on whether the charge off is legitimate or made in error. It’s essential to follow the proper steps in either finding charge-off errors or paying a charge off to ensure it doesn’t continue to show on your credit accounts as bad debt.
If You Have a Legitimate Charge Off
Debt collection scams are prevalent. Be wary of automated calls where a person says they are a debt collector. Don’t provide personal information to an unverified person over the phone, and always check whether you have a charge off.
If you do have a legitimate charge off, you should pay it. Talk to the debt collector and ask if you agree to pay the debt that they will remove the charge from your credit report.
After you pay the debt, the collection agency has no incentive to remove your charge off from your credit history any earlier than the standard seven years. Sometimes, debt collectors can arrange a payment plan so you can slowly pay off the debt.
Ask about payment plans if you can’t afford the entire amount right away. They might even be able to lower the total amount due. Make sure to get any agreements to have charge-offs removed or debt reduced in writing.
If You Have a Charge Off Made in Error
Charge-offs can be made in error. If you think this is the case, start a dispute investigation with the credit reporting agency.
Inform the creditor that you’re disputing the charge. The Fair Credit Reporting Act (FCRA) states your credit report can only show accurate, verifiable, and timely items.
If there is anything inaccurate about charge-offs, they can’t show them on your credit reports. This section of the act is sometimes called the 609 loophole.
Request a current copy of your credit report from any major credit bureau (or from all three if you want to be more thorough). You can order a free report from annualcreditreport.com. Equifax, TransUnion, and Experian are all required to provide you with a free report each year.
Check the charge-off entry for any inaccuracies. The four most common FCRA violations include:
- Inaccurate charge off dates
- Charged off account transferred or sold to a debt collection agency, and both show a past due balance
- Charged off an account with a balance reporting after a 1099-C is issued
- Creditor posting late payments after the debt has been charged off
Check that basic information, such as the account number and borrower name, is accurate as well.
Credit repair companies often advertise services to get charge-offs removed. These companies can check for errors, but they don’t have any more leverage with credit card companies than you do.
Any company that guarantees it can get your charge off removed is a scam.
However, some work on your behalf to challenge negative items creditors may have placed on your credit reports with the three credit bureaus.
Services like Credit Saint perform a full analysis of your credit history, challenges the damage you disagree with and sets you up with a plan to build credit.
The service comes highly-regarded by other users, showing 4.9 out of 5 stars with almost 170 reviews on ConsumerAffairs.com.
Consider this service if you need assistance with repairing your credit. Set up a consultation to learn more about Credit Saint and whether it can help with your charge-offs.
Can a Credit Card Company Sue You After a Charge-Off?
Yes, you can be sued for the debt in a charged-off account. The debt collector might be able to have your bank account frozen, or your wages garnished. However, the collection agency has to sue you within a designated amount of years.
The Consumer Financial Protection Bureau implemented the Fair Debt Collection Practices Act (FDCPA) in December 2020. The FDCPA prohibits debt collectors from suing (or threatening to sue) consumers for time-barred debt.
Time-barred debt is money someone borrowed and didn’t repay but is no longer legally collectible. The statute of limitations on debt varies by state. While many states put the limit between three to six years, some put the limit as high as ten years.
If somebody tries to sue you for a charge off, check to see if it is within your state’s statute of limitations for debt.
How to Pay Charged-Off Accounts
If you have the means to do so, you should always pay your charge off. Make sure you are paying the right company and see if you can get your debt reduced.
1. Determine Who Owns Your Debt
Before you pay off your debt, check if you can still work with the original creditor or if they have sold your debt to a third-party agency. Once you pay a charge off from the original lender, the status of your account should change to “paid charge off.”
The balance should then show as zero. A paid charge off looks better to lenders than outstanding debt.
If your debt has been sold to a collections agency, have the agency send you proof that it owns your account. Following your payment, your credit reports should show a “paid collection,” which also looks better to lenders than unpaid debt.
2. Negotiate Your Charge Off Status & Payment Plan
When the original creditor still owns your debt, you can occasionally make a deal to have them remove the charge off from your record in exchange for payment. This is often referred to as “pay for delete.”
They are more likely to agree if you can pay a lump sum right away. The first person you talk to might not have the authority to make the arrangement, and you may need to request to speak to an account manager. If the creditor agrees to the deal, make sure to get it in writing.
No matter who owns your debt, you can sometimes make a deal to pay less than the total amount. The debt collection agency may have only spent a few hundred dollars for thousands of dollars of debt.
A much smaller amount than your original debt total still earns them a sizeable profit. If you don’t have the entire amount, ask to be put on a payment plan to pay off your debt slowly rather than all at once.
3. Make Your Debt Payments
Wait until you have a signed, written agreement in place before you pay your debt. Never pay by cash because it’s challenging to prove you have paid. Instead, use a money order or personal check because these leave a record of your payment.
It will look better on your credit reports after your debt is fully paid. However, unless you could make a “pay for delete” deal, the charge off remains on your credit reports until enough time has passed.
A charge off stays on your credit report for seven years from when the first missed payment was reported. Until then, you can focus on raising your credit in other ways.