What Is a Charge-Off?

ByI. Mitic
January 17, 2022

Among the many different terms you may see on your Equifax report, a charge-off note is one that is rightly a cause for concern.

Financial stability is something that everyone aspires to, and a deeper understanding of your credit report will go a long way to helping achieve it. No matter if you’re actively building your credit score or correcting a mistake, this guide will explore everything from a basic charge-off meaning to the impact it can have on your financial health.

How Charge-Off Works

First and foremost, a charge-off is a debt. But not just any kind. It’s when a creditor or lender has given up on trying to collect payment to cover the debt you owe. This happens because you, the debtor, have failed to meet your payments for several months. 

Charge-offs can be incurred on virtually any type of lending account. Some examples that may lead to a charge-off include, but are not limited to:

  • Missed credit card repayments
  • Missed monthly payments on a car loan
  • Failed mortgage payments
  • Unpaid student loans
  • Missed personal loan payments

We all encounter temporary money worries from time to time, perhaps even more so since the pandemic. However, an unpaid charge won’t appear on your account as a result of failing to pay one bill, especially if you cover those costs at the earliest opportunity. It only happens when a creditor has failed to collect the debts for several months.

If you’re wondering, “How does a charge-off end up on your credit reports?”, a creditor submits a charge-off to the appropriate credit bureaus as a last resort following your inability to meet the agreed terms of your loan or account. From their perspective, it’s a key step to balancing their accounts and tax affairs. 

The fact that a creditor has given up on the debt collection process doesn’t suddenly free you from your responsibility to cover the debt. You’ll still be expected to make the necessary payments to clear your credit card account or other agreements.

You can ask for information about your charge-off from the creditor, the credit report agency, or the collections agency. This allows you to verify that all data is accurate. If it isn’t, raising a dispute can lead to the successful removal or amendment of the details.

It isn’t the very worst thing that could appear on your credit history, but it is one that should be taken seriously. 

How a Charge-Off Can Affect Your Credit

Charge-offs can remain on credit reports for up to seven years from the date that the creditor reported your first missed payment. The charge-off is viewed as a derogatory mark that will be seen by credit agencies like Equifax, Experian, and TransUnion, as well as individual lenders who check your credit history during loan applications.

It is a record of unpaid debt that shows you’re not a trustworthy borrower because you have a history of failing to manage your finances and meet the agreed repayment structure. Consequently, your credit score will see a significant drop. While the severity will gradually become smaller, there will be an impact for the full seven years.

It’s important to recognize that, in addition to the direct impact of the charge-off note, your credit report will be harmed further due to the issues that lead to creditors submitting the charge-off. Each missed payment during the months that resulted in the charge-off will have caused your score to fall. If your account is still in the status of “collections,” it’ll lower your score.

Finally, failure to satisfy the demands of debt collectors will have another significant impact on the score as it shows future creditors that they may struggle to regain funds.

It’s impossible to state the exact severity that a charge-off will have on your credit report or give a definitive answer to “How much can a charge-off affect your credit?” because credit scores are influenced by a wide range of factors. 

Nonetheless, it is safe to assume that your account won’t be in the top band on Equifax. In turn, this means you may be rejected during future applications or be forced to accept worse terms, such as higher interest rates or lower credit limits. This also means that your credit utilization percentage will be higher, which can have a negative impact.

The Difference Between a Charge-Off, Write-Off, and Transfer

As a debtor, you may encounter several daunting terms while trying to settle your accounts. In addition to a charge-off, you may see a write-off. The two terms mean the same thing. 

A charged-off account is one where the creditors and debt collectors have essentially written off the debt as uncollectible - even though you’ll still need to pay it.

Whatever you want to call it, the defaulted account is a version of bad debt from their viewpoint. Both terms are also considered final status indicators, meaning the account is no longer open or active.

You may also see the terms “transferred from” or “transferred to.” This indicates that the original creditor has sold off the account to a debt collection agency at a far smaller value. The debt collectors will subsequently try to recover as much money from you as possible.

The good news is that a transfer account will sometimes appear as a neutral factor on the credit report rather than a negative one. However, it may still show as a negative.

Paying Off a Charged-Off Account

It may be tempting to leave the written-off account unpaid. In reality, repairing - or at least reducing - the damage should be at the top of the agenda. There are three main options at your disposal:

  • Arrange a deal with the original lender. Of course, you can only do this provided that the lender hasn’t already sold the account. You should have probably done this as soon as you fell behind on the payments, but it’s better to be late than avoid it altogether. Once the repayment plans have been made and completed, the account can be changed to say “paid charge-off.” It’s seen by most lenders as a better solution than an unpaid charge. It indicates you have shown responsibility in recent times.
  • Negotiate and settle a debt with the lender or collections agency. This means you’ll pay less than the original charge while the creditor recovers some of the debt. The account will now appear as a “settled charge-off,” which will still have a negative impact on your credit report - although it does prevent it from being submitted to collections.
  • Pay the collections agency that has bought the account. You should ask for proof that it owns the debt before making a payment. The status of the account will change to say “paid collection.” It’s still likely to have a negative influence on your credit report but the damage will be far less than it would have been for an unpaid account. Once again, it shows you have taken accountability for past errors.

Once an account has been officially charged off in a legitimate way, there is little you can do to remove it from the credit history. Nonetheless, getting the status updated to reflect your late payment will have a positive influence. Ignoring the charge is not an option. If you need help settling a debt, you can always contact a debt settlement agency

Minimize the Damage

A charge-off, or write-off, is something that you should try to avoid by keeping up with the payment plans on all debts. However, if you do fall behind and see this mark on your credit report, you should know that the charge-off can remain on the credit history for seven years and can cause serious damage to your score.

Still, if you respond in the right way, the bulk of the damage can be cut to two years or less - most importantly, you must seek to speak with creditors or credit bureaus ASAP.

FAQ

How do I remove charge-offs from my credit?

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When the charge-off is erroneous or disputable, the first thing you’ll want to know is, “How do you remove a charge-off from your credit reports?” Contacting the credit bureaus about false info or a charge that stays on your report after seven years will result in an investigation. You should receive a verdict in 30 days. For legitimate but unsold cases, contact the lender directly.

How bad is a charge-off on your credit?

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Quite bad. Discovering that a creditor has filed your account as a charge-off isn’t as damaging as filing for bankruptcy, for example. Still, it’ll bring considerable damage to your credit score that can continue to restrict your borrowing prospects for seven years. It can be particularly problematic when you’re planning to apply for a mortgage in the near future.

Should you pay off a charge-off?

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Now that you appreciate the full details of the charge-off meaning and impact it causes, you know that a legitimate charge-off should be paid off, not least because some lenders may refuse to approve new loans and mortgages until all existing debts are cleared. Once it has been paid, settled, and discharged, its impacts will gradually get smaller over time.

About author

For years, the clients I worked for were banks. That gave me an insider’s view of how banks and other institutions create financial products and services. Then I entered the world of journalism. Fortunly is the result of our fantastic team’s hard work. I use the knowledge I acquired as a bank copywriter to create valuable content that will help you make the best possible financial decisions.

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