What Are Charge-offs and How Do They Affect My Credit?

A charge-off occurs when a creditor determines that a debt is unlikely to be paid. If a debt is unpaid, usually for 180-days or more, it will probably be declared a charge-off. This allows the creditor to write it off as a tax deduction, since the loan is no longer considered an asset for them. But this doesn’t mean you are off the hook for repaying the loan.

On the contrary, your debt is owed until it is paid, and a charge-off is the worst thing you can have on your credit report.  If you were under the impression that your debt would just go away if you didn’t pay it, you were sorely mistaken. Not only will you have to repay it, but you will probably have a hard time getting any kind of credit in the future. After all, the purpose of your credit report is to show lenders your ability to repay debt. A charge-off shows them that you’re their worst nightmare – a borrower who will not repay.

What can I do about charge-offs on my credit report?

The charge-offs will stay on your credit report for seven years, until they must be removed under the Fair Credit Reporting Act. However, some states do not have a statute of limitations for debt collections efforts, so you could find yourself being hassled by collectors and even facing lawsuits years after the delinquency date if you fail to pay your debt.

The best thing you can do if you have a charge-off on your credit report is to make a plan to pay it as quickly as possible. Then, although it will still appear on your credit report, it will show as “paid in full” or at least “settled for less than owed,” and this is better than having it unpaid. It’s obviously better to have it “paid in full,” so decide now to take steps toward improving your credit and fixing any negatives on your credit report today.

Pay for Deletion

There is also the option of trying to arrange a “pay for deletion” with the original lender. This is basically a plea for them to remove the charge-off on your credit report if you pay the debt. You could also send a goodwill letter to try to have the charge-off removed. Many companies are bound to report to collecting agencies so you may have a tough time getting them to remove the charge-off, but it definitely doesn’t hurt to try. If removing the charge-off isn’t an option, you could try to negotiate having the debt appear as “closed” rather than “charged-off” on your credit report.

Charge-offs can be a significant negative on your credit report and have a big impact on your future borrowing ability. If you want to get a new car, open a new credit card, or buy a house in the next seven years, it’s best that you settle any charge-offs or other negatives on your credit report as soon as possible to start repairing and rebuilding your credit.