Next to bankruptcy, charge-offs are one of the most damaging items you can have on your credit report. However, the term “charge off” can be confusing and many people don’t understand what they are, or why they hurt their credit scores. The first thing to realize is that charge-offs do not free you from the financial obligation to pay a debt. Though the collection calls from the original creditor will likely stop coming, and you won’t receive notices in the mail anymore, this is only the calm before the storm. 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.
What is a charge-off?
A charge-off occurs when a creditor deems a debt to be “uncollectable” in order to write it off in their accounting records. Different companies handle charge-offs in different ways – some have an internal collection department, while others sell old debts or contract third parties to collect for them. No matter which option a company chooses, a charge-off can be a real headache. Not only does it damage your credit report, it also often results in new collection activity.
How soon after a late payment can a charge-off occur?
Some people think that charge-offs only occur after several months of no payment on an account, and when they do, it’s an easy situation to correct. Unfortunately, that’s simply not true. Charge-offs can occur as soon as 90 days past-due, though most companies wait six months. Regardless of when the charge-off occurs, getting it resolved can be difficult if the company sells their debts to a third-party collection agency.
Do charge-offs hurt your credit score?
Charge-offs are a significant negative when seen on your credit report, and are much more damaging than a 30-day or 60-day late notation. When charge-offs appear on your credit report, they serve as a red flag to other potential lenders – even if most of your accounts are up-to-date and paid on time, a single charged off debt can cause you to be denied for multiple types of credit. While not as bad as a bankruptcy or a foreclosure, most creditors won’t lend to someone who has multiple charge-offs on their credit report. Additionally, nearly all mortgage lenders require all charge-offs to be cleared before issuing a home loan. Plus, you may even have trouble qualifying for credit cards and store cards.
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. Once your account is in charge-off status, paying the charge-off will only help your credit slightly. A paid charge-off is certainly better than one that is unpaid, but in terms of your credit score, the lift is usually minimal. While you can negotiate to get the charge-off removed in return for full payment, these types of requests are not always honored by the creditors. If you do negotiate this deal, make sure you get it in writing from your creditor or collection agency before actually making any payment.
Do you still have to pay a charge-off?
Even if your debts are now charge-offs, you are still liable for the debt. If the statute of limitations has not expired on collecting the debt, you may even be sued for what you owe. Never assume that you don’t have to pay your charge-offs – always verify the facts. Because calls and letters from the original creditor often stop when charge-offs occur, however, many people think that they are in the clear. What actually happens is that the creditor has turned your account over to an in-house or third party collection agency, who then resume the collection attempts. 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.It’s still your responsibility to address these issues in order to stop collection attempts and clear up your credit.
Why are there multiple charge-offs listed on your credit report for one account?
You can have one, two, three, or even more charge-offs listed for the same account. The reason is that debt collection companies often sell debt to other collection agencies, leaving a trail of charge-offs in their wake. Cleaning up these multiple negative listings can be a real hassle and your credit scores will drop for each new charge-off account listed on your report. If you have an account that’s been charged off, it’s wise to look at your credit report to see how it’s listed and do what you can to get multiple entries removed.
Can charge-offs be removed from your credit report?
Despite the very definite negatives that come with charge-offs, there is still hope. These negative listings can be removed if they are inaccurate or unverifiable, just the same as any other debt. And like other debts, there is a credit reporting limit in effect. If it’s after the credit reporting limit (generally seven years) then the charge-offs must be removed from your credit report.
Can paying old charge-offs be damaging?
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 ten 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 might not even help your credit.
Is it possible to remove charge-offs from your credit report?
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 deleted. 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. To successfully dispute a charge-off, you should know your rights under the Fair Credit Reporting Act (FCRA) as well as how these laws protect you from errors on your report.
When initiating a dispute, you’ll need 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.
How can you get help while disputing a charge-off?
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.
How can you prevent charge-offs in the first place?
Once you understand the seriousness of charge-offs and how they affect your credit, you can take steps to avoid having them listed in the first place. Here are three quick tips to avoid charge-offs on your credit file:
- Keep all accounts as current as possible. If you can’t pay up in full each month, try to come to an arrangement with the creditor. The goal here is to never be more than 60 days past due on any debt. That way, you are assured of avoiding a charge-off.
- Pay attention to any “Final Notice” bills that you receive. Go to the original creditor and try to work something out before the debt is sold to a collection agency. You’ll find that most creditors are willing to work with you because they get more money if they don’t hire out an agency.
- Get professional help. If you are having problems with your credit, a credit repair specialist may be able to help you avoid the pitfalls of charge-offs and improve your credit scores at the same time. Disputing inaccurate information (such as debts listed as past-due when they’ve been paid) can help to keep your account from going so far into arrears that the debt is charged-off.
No matter what you decide to do to get rid of or prevent charge-offs, there is no better time to act than right now. Charge-offs don’t have to ruin your financial future if you are smart and take the time to be proactive about repairing your credit.