Understanding how charge-offs work is important if you want to repair your credit and get back on your feet. Here are the facts about charge-offs that will help you make the right decision when it comes to improving your credit.
Charge-offs Still Leave You on the Hook
Because calls and letters from the original creditor often stop when charge-offs occur, many people think that they are in the clear once the collection activity stops. The truth is that creditors are required to charge-off your debts within 180 days of nonpayment. It’s an accounting practice that allows them to report the account as a loss, but that doesn’t mean their collection efforts will stop entirely.
Many creditors will turn your account over to an in-house or third party collection agency. Most often, these collection agents will then attempt to collect the full debt, even if it is thousands of dollars. In the case of third-party debt collection agencies, you will have not only charge-offs, but separate collection accounts listed on your credit report.
These third party debt collectors buy your debts for much less than they are worth and are only seeking to make a profit. They won’t hesitate to trash your credit report with multiple charge-offs as they sell your debt from one company to the next. Because of this, it is possible to have multiple charge-offs and collections accounts listed on your credit report from a single debt. Tracking down who really owns the debt can prove difficult, if not impossible, as not all debt collection agencies keep accurate records.
Charge-offs Carry Huge Credit Penalties
Beyond the harassment and stress of dealing with debt collectors calling you at home and at work, charge-offs lead to big drops in your credit score – as much as 50 points to 100 points. This is particularly true if you’ve never had credit problems in the past.
Credit bureaus calculate your score by using patterns of behavior that include the number of times you’ve had negative information listed on your report, the kinds of negatives on your report, and how long ago a negative item was placed on your report.
That last is very important as it means that a recent charge-off is hurting your credit score much more than one from several years ago. And when it comes to charge-offs, even paying them doesn’t get rid of all the damage.
A charge-off that is listed as “paid” or “settled” still affects your credit scores negatively until it is removed from your credit report. The only time paying your charge-offs helps you is if you can negotiate with the creditor (in writing) to remove the charge-offs when the debts are paid, or to update the account to say ‘Paid As Agreed’ with no mention of the charge-off.
Paying Old Charge-offs Can Hurt You
It’s not uncommon to get a lot of collection activity around charge-offs that are many years old. This can happen for two reasons:
1. The debt is close to being “time-barred” (meaning the debt collectors won’t be able to sue you to collect anymore). Debt collectors use high-pressure tactics to try to get a payment or a promise to pay, which restarts the clock on how long they have to collect. If you fall for this trap, you may find yourself facing a judgment or lien.
2. The debt is close to the reporting limit (meaning that the charge-off won’t show up on your credit report anymore). Even if the charge-off is time-barred, if it’s on your credit report it is still a negative mark. You can’t get certain types of loans such as mortgages if you have charge-offs on your account. Debt collectors try very hard to collect on accounts that are about to fall off of your credit report, because they know that they will have zero leverage once the debt is past the time it can be reported.
In either of these cases, paying or making a promise to pay on the debt can put you in a dangerous financial situation. You open yourself up to lawsuits, and some unscrupulous creditors will try to list the account as being brand new if they can get even a token payment from you. This opens you up to not only legal issues, but additional drops in your credit as more recent negative information weighs your credit score down the most.
You may also find that debt collectors will try to collect on debts that aren’t even listed on your credit report! These debts may be 10 years old or more, and they are hoping that you will pay up without checking your credit reports first.
Again, paying anything on these types of charge-offs puts you at risk for being sued to collect. And if the charge-offs aren’t listed on your credit report, paying them will not help your credit scores to improve.
It IS Possible to Remove Charge-offs
Getting rid of charge-offs on your credit report may seem impossible but it isn’t. First, it’s important to recognize the fact that ANY error on your credit report can be removed. That means if third-party debt collectors have been sloppy with their paperwork and have filled your credit report with mistakes, you can get every single one removed.
This means any mistakes, including mistakes in the amount that you are supposed to owe, mistakes with your account itself, and even simple computer errors can all result in a removal if the company doesn’t have records to correct their data. For charge-offs that are several years old, your account may not even be in their system anymore.
The dispute process that you can use to remove charge-offs from your credit report requires that you know the law and your rights under the Fair Credit Reporting Act (FCRA) as well as how these laws protect you from errors on your report.
Additionally, you’ll need to be able to keep track of all correspondence between you, the creditors, and the credit bureaus. If you want to be sure that charge-offs are removed, you will also have to be certain that you frame your requests carefully. If the credit bureaus think your request is “frivolous” they will ignore it, even if you have a valid error to remove.
For many people, all of the work involved in getting charge-offs removed is just too much hassle to do alone. No one wants to have to speak to debt collectors on the phone, and no one wants to be in the position of having to keep track of multiple letters sent back and forth to creditors and credit bureaus.
Often, the best solution is to speak with a credit repair specialist that is familiar with the law. They will be able to explain to you how charge-offs can be removed from your account, step-by-step. They will also be able to help you manage the process to ensure that the credit bureaus and your creditors actually listen to you instead of blowing you of as one more uninformed consumer.
Even if you do decide to do it all on your own, take the time to speak with a professional and be sure that you have accurate information. The sooner you take care of the charge-offs on your credit report, the sooner you get to have financial freedom and peace of mind.