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A charge-off, which appears on your credit report after a lender or other creditor gives up trying to collect a debt you owe, remains on your credit report for seven years. Lenders view charge-offs as derogatory events in your credit history, and charge-offs can lower credit scores and make it more difficult to qualify for new loans or credit. Here's what to know,
What Is a Charge-Off?
A charge-off is a negative entry that appears on your credit report after a creditor tries and fails to get you to repay a debt. After seeking payment for four to six months (120 to 180 days), typically attempting to communicate by mail, phone and email, the lender may decide to close your account and write off your debt as a loss. If they do, the lender typically reports the debt as a charge-off to the national credit bureaus (Experian, TransUnion and Equifax), which then tag your account as charged off on your credit reports.
A debt that has been charged off is not forgiven or erased. You are still legally obligated to pay what you owe. Within a few months of a lender writing off a debt, the status of its account on your credit report will change to indicate it has been charged off.
Your credit report may still list the amount you owe as the outstanding balance on the account, but that may not be the case for long. Creditors often sell charged-off debts to third-party collection agencies.
If that happens, the balance on the charged-off account changes to $0, and a separate collection account, with a balance equal to that of the charged-off account (plus possible interest charges), appears as yet another negative entry on your credit report.
Once a debt is turned over to collections, you must address it with the collection agency, not your original creditor.
Learn more >> When Does Debt Become Delinquent?
How Long Do Charge-Offs Stay on Your Credit Report?
A charge-off can appear on your credit report for up to seven years from the first missed payment (or delinquency) that led to the charge-off.
After seven years, a charge-off should automatically fall off your credit reports.
How Much Does a Charge-Off Affect Your Credit Score?
As with most derogatory credit report entries, the number of credit score points a charge-off will cost you depends on multiple factors, including:
- The system used to generate the score (FICO and VantageScore® ™ are the most common credit scoring companies)
- How high your score was before the charge-off
- How many other negative entries were listed on your credit report when the charge-off appeared
The specific number of points by which a charge-off causes your credit scores to fall may be relatively small, if only because your scores may have already suffered by the time the charge-off occurs.
A charge-off typically happens only after you've missed four to six consecutive payments on a given debt. Because payment history is highly influential in determining credit scores, the first payment that's late by 30 days or more typically brings the most significant drop in credit score, and scores may drop further each month the debt remains unpaid.
Learn more >> Late Payment vs. Missed Payment: What's the Difference?
How to Remove a Charge-Off
There is nothing you can do to get a legitimate charge-off removed from your credit report.
If a charge-off is wrongly ascribed to you, or if it fails to expire from your credit report seven years after the missed payment that prompted it, you have the right to submit a dispute to the national credit bureaus to correct the record.
You may need to supply supporting documents to prove that the information is inaccurate, so gather that before preparing to submit your dispute. You have the right to dispute credit report information online, by phone or by mail.
Disputes are typically resolved within 30 days, but may take up to 45 days if you submit additional documents after the investigation begins. Your dispute can lead to the information being verified, updated or deleted.
How to Rebuild Your Credit After a Charge-Off
A charge-off on your credit report can do significant damage to your credit scores, making it more difficult to qualify for a mortgage or other credit. Here are some ways to rebuild your credit after it has suffered a setback:
- Pay bills on time, without fail. Payment history is the single greatest factor affecting credit scores, so making sure you never miss a payment by 30 days or more is essential to steady credit score improvement.
- Reduce credit card balances. Your credit utilization ratio—the percentage of available revolving credit (mainly credit cards) represented by your outstanding balances—accounts for 30% of your FICO® Score☉ . Utilization greater than about 30% can hurt your scores, and individuals with excellent credit tend to keep utilization ratios below 10%.
- Try a secured credit card. If damage to your credit scores disqualifies you for traditional credit cards, a secured credit card can help show that you can handle regular debt payments. A secured card requires you to put down a security deposit, which is typically equal to your credit limit. If you fail to make a payment, the lender can keep your deposit; if you stay current with your bills, however, the timely payments are reported to the credit bureaus, which can lead to credit score improvement.
- Apply for credit only as you need it. Each new credit application typically prompts the lender to view one or more of your credit reports. This results in a hard inquiry on each requested report, which can lower your credit score by a few points temporarily. Inquiries are only responsible for about 10% of your FICO® Score, but lenders may see multiple credit applications over a short time as a sign of financial troubles.
- Consider paying off collections. If you have one or more charge-offs on your credit report, there's a good chance each has a corresponding collection account associated with it. If your credit score is calculated using more recent versions of the FICO® Score or VantageScore credit scores, paying off a collection account could benefit your credit scores. Perhaps more importantly, it can halt accumulation of interest charges, end the threat of a lawsuit and stop phone calls and other communications aimed at collecting what's owed.
The Bottom Line
A charge-off on your credit report may leave your credit scores in rough shape, but its negative impact will lessen considerably over the seven years it appears on your credit reports. In the meantime, you have time to rebuild your credit. Be aware, however, that some lenders consider a charge-off on your credit report grounds for denying a credit application, so it's best to avoid them in the first place. If you're working to improve your credit scores, you can track your progress by regularly checking your FICO® Score from Experian.
