What is a Charge-Off and How Do I Remove It?

by Manage Money

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A charge-off is an unpaid loan that has six months of missed payments. After six months of delinquency, lenders classify loans in this way. Essentially, the lender has given up on getting their money back, written it off as a loss, and your credit score drops as a result.

It’s important to understand that you are still responsible for the debt even though the lender has charged off the loan account. Getting a charge-off removed from your credit report is very difficult, but not impossible. The best strategy to remove it and raise your credit score depends on your circumstances.

How Does a Charge-Off Get On Your Credit Report?

When you take out a loan for any reason, you agree to make regular monthly payments to the lender. If you miss a payment, your loan account becomes delinquent, meaning you are not on track to paying it off in the agreed way.

At this point, lenders tend to send out letters and emails, and even make calls to make sure you understand the situation.

After six months of delinquency (missed payments), lenders are required to charge off the account. This might mean they will stop actively trying to collect because they don’t expect to be successful. Lenders are required to report these situations to credit bureaus, which is when the charge-off shows up on your credit report.

Difference Between a Charge-Off and Collections

Though they are related, charge-offs and collections are somewhat different. A charge-off is initially owned by the lender, in most cases a bank. This means that the borrower owes the bank money.

After an account has been charged off, the lender may choose to sell that debt to a collection agency. The agency then owns the charge-off, and they become the recipient of the money owed.

Collection agencies will then begin trying to collect the debt owed. They tend to be more aggressive than the initial lender and take borrowers to court in some cases.

Credit Score Impact

Charge-offs have a very negative effect on your credit score. However, they tend to be the cause of credit staying low rather than becoming low in the first place.

A charge-off only occurs after six months of delinquent payments, and each of those missed payments lowers your credit score. This means that the borrower’s credit is already low by the time debt has escalated into a charge-off.

But, charge-offs stay on your credit report for up to seven years, making it challenging to get a loan until it’s gone.

When to Not Pay

Even though the lender may not actively seek out payment for your account, you are still responsible for the money owed. However, there are two things to do before paying the account.

Confirm the Charge-Off is Real

The first thing you should confirm is authenticity. Make sure the notice is for an actual loan that you took out and went delinquent on. While scams of this nature are not common, always ensure it’s validity before paying it.

Confirm the Charge-Off isn’t an Error

If the charge-off is not correct, you should not pay it until the error is resolved. This could be because the charge-off…

  • is for a loan you never borrowed
  • is for a loan you took out, but for the wrong dollar amount
  • shows you owe money to both the original lender and a collections agency (it should be one or the other).

If any of these happen, you should get in touch with the lender or collections agency responsible and try to get it sorted out. If that fails, you should file a report with the credit bureau reporting the information. They will investigate the claim to verify its accuracy. You can even work with sites like Experian if you want assistance with a dispute.

Different Ways to Pay

In the case of a legitimate and accurate charge-off, it’s always in your best interest to pay it off as soon as possible. Depending on your situation, there are a few ways to do this.

Pay the Original Lender

The lender is the initial owner of the account, and you can pay them the amount owed as long as they have not sold the debt to a collections agency.

Paying them will change the charge-off on your credit report to “paid.” It will still show up, but future lenders will likely look more favorably on a paid charge-off than an unpaid one.

Settle the Debt

This option won’t work with every lender, but sometimes you can settle the debt by negotiating to pay a smaller sum. If you can’t pay the total amount, it can be worth reaching out to the lender to see if this is an option.

This will appear on your credit report as “settled.” Future lenders may prefer this over an unpaid charge-off, but not as much as a paid one.

Pay the Collections Agency

If the lender has sold the account to a collections agency, you pay the agency directly. Unfortunately, at this point, paying the collections agency will likely not have a positive effect on your credit.

Removing a Charge-Off From Your Credit Report

There is only one surefire way to remove a charge-off from your credit report: wait seven years. After that amount of time, the account will not be seen by potential lenders. During the seven-year wait, it will show on the report as unpaid, settled, or paid.

It’s important to understand that even though the account disappears from your credit report, you are still legally responsible for the debt and can be taken to court over it if unpaid. It is always best to get them paid off as soon as you can.

It may be possible to negotiate with your lender and have them remove the charge-off, but this is a very rare occurrence. This option will almost always require full payment of the debt, and the lender will have to agree to it. Most lenders will not remove the charge-off. They have a responsibility to report accurate information to the credit bureaus, which typically means charge-offs will stay up for seven years, even if they’ve been paid.

How to Avoid Charge-Offs in the Future

The key to avoiding charge-offs is avoiding delinquency on your debt. As long as you don’t fall six months behind on payments, you will not get any charge-offs.

The first step is to be cautious when you borrow money. Houses and cars are nice, but if they’re beyond what you can pay back, they’re not worth it.

When you’ve already got debt, make paying it off a priority, with an intentional plan for staying on top of it. Depending on your situation, you may be able to pay it off in the form of a snowball or an avalanche.

If you’re unable to keep up with monthly payments on a loan, consider selling the asset.

Understand too that lenders would rather receive something than nothing, and communication can be life-saving. You may be able to talk with the lender and negotiate a different arrangement for paying off or settling the debt rather than becoming delinquent.

Related Questions

What is a Charge-Off on a Credit Report?

A charge-off is an unpaid loan that has been delinquent for six months.

What is a Charge-Off on a Car Loan?

This means the borrower has been delinquent on car payments for six months, often resulting in the lender repossessing the car.

Is a Charge-Off the Same as a Write-Off?

No. A charge-off is a way of classifying a delinquent loan account where the borrower is still responsible for the debt. A write-off is when the lender forgives a portion of the debt and does not require payment.

How Bad is a Charge-Off?

Charge-offs make it very difficult to get loans, and they will keep your credit score down for seven years. Since you are still responsible for the debt, they can also lead to collections agencies, court cases, and garnished wages.

Is a Charge-Off Worse than a Collection?

No. If you can pay the charge-off before it goes to collection, the unpaid balance will be removed from your report, having a positive effect. It will still show the charge-off but will indicate it’s been paid.

Once an account goes to collection, the unpaid amount no longer appears on the report, just the collection. Paying the collection agency is required but will not have a positive effect on your credit score.

Is a Charge-Off Worse than a Settlement?

An unpaid charge-off will make it more difficult to get future loans than a settled debt.

Should I Pay Charged Off Accounts?

If the charge-off is accurate, yes. You are legally responsible for the debt. If it’s a mistake, no. File a report with the credit bureau reporting it, and they will investigate the situation.

How to Remove a Charge-Off without Paying?

You can’t. The only way to remove a charge-off from your credit report is a seven-year wait. Even then, you are responsible for the money owed.

The only ways to make the debt disappear are paying it off, settling with the lender for a smaller amount, or getting the lender to write off and forgive a portion of the debt.

How to Dispute a Charge-Off?

If you believe a charge-off is inaccurate, communicate with the lender and file a report with a credit bureau.

Final Thoughts

A charge-off account can negatively impact your credit score and make it difficult to get loans in the future. But even after six months of missed payments, it is possible to pay off the debt. As you take out loans in the future, be sure to manage your money carefully and don’t bite off more than you can chew.

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