What Is a Charge-Off?

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A charge-off is an entry on your credit report that indicates a creditor, after trying and failing to get you to make good on a debt, has given up hope of getting payment and closed your account. A charge-off is considered a derogatory entry in your credit file—a serious negative event—and it can adversely affect your credit scores and your ability to borrow additional funds.

What Does a Charge-Off Mean on Your Credit Report?

Creditors typically charge off accounts after they've been delinquent—gone without any scheduled payments—for six months. After the first month's delinquency, the account entry will move from the "Accounts in Good Standing" section of your credit report to a section titled "Negative Items" or "Negative Accounts." Its entry will indicate the outstanding balance on the account and how long it has gone unpaid in 30-day increments up to 180 days. If the creditor decides after 180 days to charge off the account, its entry and the outstanding balance will still appear on your credit report, but it will be noted as charged off.

If the creditor subsequently sells your debt to a collection agency, the balance due on the charged-off account will change to zero, but the charged-off account will remain on your credit report for seven years. At that point there's nothing you can do to remove it unless you can prove the entry is inaccurate.

Note that a charge-off does not mean your debt is forgiven. You are still legally responsible for repaying the outstanding amount. As long as the account entry is designated as a charge-off and displays an outstanding balance, you can contact the creditor to make payment. Doing so will change the account designation from "Charge-Off" to "Paid Charge-Off." The listing will still remain on your credit report for seven years. Paid charge-offs are still considered derogatory entries on your credit report, but some lenders view them as less negative than unpaid charge-offs.

The Difference Between a Charge-Off and Collections

Once a creditor has charged off an account, it often sells the debt to a third-party collection agency, which then takes over efforts to collect what's owed. If this happens to you, two changes will appear on your credit report: The balance owed on the charged-off account will change to zero, and a new entry will appear in the credit report in a section headed "Collections." The collections entry—yet another derogatory item in your credit file, which may cause further incremental reductions in credit score—will include contact information for the collection agency.

You'll probably know about these changes long before you see a credit report, because you will likely be bombarded with letters and phone calls. Collection agencies are notoriously aggressive and relentless in pursuit of their money—and in fact, the debt you once owed to your creditor is now owed to the agency. Any effort to settle the debt will have to be arranged through them.

Should You Pay Charged-Off Accounts?

The outstanding balance on a charge-off account is still your debt, and you are legally responsible to pay it—to the original creditor or the agency that buys the debt. Furthermore, lenders who see unpaid charge-offs or collections may question your willingness and ability to repay future debts. Some will likely consider any charge-off grounds for declining a credit application, but some lenders will view paid charge-offs more favorably than unpaid accounts.

How Does a Charge-Off Affect Your Credit Score?

Late and missed payments hurt your credit scores more than any other single factor, and your scores suffer more every month a bill remains unpaid: A payment that's 30 days late hurts your score pretty significantly, and the damage gets worse if the bill remains unpaid after 60 days, 90 days and so on. A charge-off will lower your credit score, but it typically occurs only after six successive months of delinquency-related score reductions, so your score is likely in pretty rough shape by then anyway. As with any negative entry on your credit report, the exact number of points you'll lose depends on the scoring system used (FICO® Score or VantageScore, for instance), what your score was before the entry appeared, and how many other negative entries already appear on your credit report.

You should do your best to satisfy all debts you owe, but paying off charge-offs and collections likely won't benefit your credit score much. The negative impact to your scores will ease over time, and credit scores will slowly recover over the space of several years.

So if you want to raise your credit scores—which may be necessary to get lenders to even consider reviewing an application from you—you're better off using available funds to pay down debt on open accounts before using them to settle charge-offs or collections.

How to Dispute a Charge-Off

If your credit report contains an inaccurate listing of a charge-off account, or if a legitimate charge-off entry remains on your credit report for more than seven years after the account first went delinquent, you can contact Experian to dispute the entry. Once you've provided necessary documentation, Experian will correct the entry and notify the other national credit bureaus (Equifax and TransUnion) to correct their records as well.

The best way to handle charge-off accounts is to pay your bills on time every month and avoid getting them in the first place. But if you get a charge-off on your credit report, it'll likely take several years for your credit report to fully recover. You can use that time to work on improving your credit score in other ways. Be patient and persistent, and your credit should improve.

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