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 charge-offs are, or why having them listed will 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.
Charge-offs actually indicate that the creditor is counting your debt as a “loss” for accounting purposes – and the creditor can and often will continue to try to collect on the debt via other means. Usually, by contracting with a collection agency, or using their own in-house collections team.
What Are Charge-Offs?
Charge-offs are when a creditor deems a debt to be “uncollectable” in order to be able to write it off in their accounting records. Different companies handle charge-offs in different ways – some have an internal collection department, while others will sell old debts or contract third parties to collect for them.
No matter which option a company chooses, charge-offs can be a real headache for consumers, not only because of the damage to their credit reports but because of the collection activity that often occurs as a result.
Myth: Charge-offs only occur after several months of no payment – and when they do, they are easy to correct.
Fact: 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.
Myth: Charge-offs really aren’t that damaging to credit scores.
Fact: 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. 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.
Myth: Since the company has written off the debt, I don’t have to pay my charge-offs.
Fact: Even if your debts are now charge-offs, you are still liable for the debt and if the statute of limitations has not expired on collecting the debt, you may be sued for what you owe. Never assume that you don’t have to pay your charge-offs – always verify the facts.
Myth: Since I only have one account, I can’t have multiple charge-offs listed for it.
Fact: You can have one, two, three, or even more charge-offs listed for the same account. The reason being, debt collection companies often sell debt to other collection agencies as well – 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.
Myth: Charge-offs are permanent – once you get one on your credit report, there is no getting it off.
Fact: Despite the very definite negatives that come with charge-offs, there is still hope. These negative listings can be removed if they are inaccurate, just the same as any other debt. And like other debts, there is a credit reporting limit in effect – so if it’s after the credit reporting limit (generally 7 years) then the charge-offs must be removed from your credit report.
Why Charge Offs Hurt Your Credit Score
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.
The most notable example of this is a mortgage. To qualify for any mortgage, you will most likely have to pay off any charge-offs listed on your credit report. However, you may also find that you are turned down for store cards and credit cards as well.
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.
Understanding Charge-offs and Your Credit
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:
1. 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.
2. 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.
3. 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.
Preventing Charge Offs
Every company has different internal policies about when a debt will be considered charged off. However, a general rule of thumb is that a debt will be listed as a charge off after 180 consecutive days of non-payment. This means that for the majority of creditors, you will be hit with charge-offs around the six-month mark.
Once this happens, there are only two ways to deal with the charged off account:
- Settle with the original creditor (or the collection agency) to get the listing removed.
- Wait for the reporting limit to expire, and the charge-off to drop from your credit report – in roughly 7 years.
To prevent charge offs, you have several options:
- Make your minimum payments. This is the simplest solution if you have the funds available. You don’t need to pay off the entire amount of your debts, so long as you can meet the minimum payments necessary.
- Work out a payment agreement. If you just can’t afford to pay the minimums right now, you may be able to get your creditor to agree to a temporary halt in collection activity if you make a good faith effort to come to an agreement.
- Take action to catch up on debts that are 4 or 5 months behind. In some cases, it doesn’t have to be the full amount that you owe at that point. Making a payment in good faith may prevent your creditor from turning over the account to collections.
Charge Offs and Statute of Limitations for Debt Collection
It’s important to remember that the statute of limitations (SOL) for how long a creditor has to sue for a debt is not the same as the time that a listing can remain on your credit report. It is very common for debt to be time-barred to an actual lawsuit, but still legally reportable on your credit report – thereby damaging your credit scores.
Further complicating matters is the fact that the SOL varies from state to state, and some creditors enforce the SOL in various ways. For instance, some creditors will apply the laws of your state of your current residence to determine whether or not the debt is time-barred.
Other creditors will use the SOL of the state where you lived when you first took out the loan or credit card. Still, others will use the SOL of the state where the business is located – so it’s important to know which location will be used for the SOL if you decide to “wait it out” for your charge offs.