A charge-off refers to a credit card debt or any other form of loan that the lender deems unlikely to be paid by the borrower. If the creditor finds you have become too delinquent in paying after some time, a charge-off often follows. A charge-off, however, does not mean the debt is canceled. Getting a charge-off can often have severe consequences on your borrowing ability because it negatively affects your credit score. But there are also ways to remove charge-offs, balance your finances, and improve your banking history and credit score over time.
Here’s a closer look at how charge-off works, how it can affect your credit score, and tips to remove a charge-off from your credit report.
How a Charge-Off Works
When a creditor has determined that outstanding debt is not likely to collect, a charge-off is likely to occur. This typically happens after about six months or more of non-compliance with the payment schedule. Debt payments that fall below the minimum amount over an extended period may also be charged-off if you (the debtor) do not pay the shortfall. The lender will then sign off the debt as uncollectible before marking it as a charge-off on your credit report.
The big hit in having a charge-off included in your credit report is the decrease in your credit score and subsequent difficulty in getting credit. If you get approved for credit, you are unlikely to get decent interest rates.
When you pay off the outstanding debt flagged as a charge-off, but the charge-off status will remain on your report. The status changes to “charge-off settled.” or “charge-off paid.” That said, charge-offs stay on your credit report for seven years.
Once affected, you need to wait for the seven years to elapse or talk with your lender to have the charge-off status removed after clearing the debt. If you had a financial setback such as job loss, you could write to the lender with proof of good payment history.
How Does a Charge-Off Affect Your Credit Score?
Charge-offs on your end can have a damaging effect on your credit score and rating. Once your account is charged off, your details go to the three major credit reference bureaus, and the record stays there for seven years. A charge-off is a warning to lenders that you have failed to honor repayment terms before.
Therefore, you should do your best to settle your debt before you default to the point where you get a charge-off. If you pay your debt in part, call the customer service and convince them about your situation.
The number of credit score points from the charge off and the impact it has on your credit report depends on:
- Scoring system used
- Your score before the charge-off entry
- Pre-existing negative entries on your credit report
Sometimes the charge-off alone may not significantly lower your credit score, but the effect can be huge if you have numerous other negative entries.
Missed and late payments can also hurt your credit score. If your first payment is delinquent for 30 days, you could be hit harder and can get worse each month the debt is unpaid.
Since a charge-off in most cases happens after six months of default, your credit score will get lots of negative hits.
How To Remove a Charge-Off From Your Credit Report
If your account gets a charge-off, the effects can be long-lasting. Finding ways to remove the charge-off from your report should be a priority.
While it won’t be easy and will take some work, every effort is worth it.
Here are some of the ways to remove charge-offs from your credit report.
1. Pay Your Debt To Have the Charge-Off Entry Deleted
While clearing the payment for a charge-off may not typically lead to a credit score improvement soon, you will see a better score over time. To expedite the process, keep paying your debts on time, and even if you can’t, handle it responsibly by negotiating with your creditor.
Talk to your creditor requesting the removal of the charge-off from your credit report by promising to clear the outstanding balance. You may clear the debt or come up with a repayment plan. Whatever option you choose, get a written agreement with your creditor to have the punitive entry deleted.
2. Start a Charge-off Dispute
You have a chance with the Fair Credit Reporting Act to complain and dispute any incorrect information on your report.
Check out the loan balance and note that the balance of your primary lender must be nil if the creditor has sold it to the debt collector. Otherwise, it will damage your credit score. You should also scrutinize the late-fee penalty dates. When you launch a dispute, the bureau gives the designated debt collector a month to put the numbers in order.
3. Goodwill Adjustment
You could send goodwill adjustment letters citing personal hardship and requesting a change in your credit report. If your record before the default was good, you have a good chance.
If you can convince the bureau about unexpected personal hardships like abrupt job loss or medical bills, you may have your credit report adjusted. You could also use a goodwill adjustment to straighten an outright mistake.
4. Be Patient
If any of your efforts to delete the charge-off fails, patience will do the trick. A charge-off is maintained on your report for seven years. While this can seem long, its effect decreases with time. Pay your loans and bills on time, and your credit score will gradually go up.
Tips To Avoid Charge-Offs
If you can avoid it, steer clear of a charge-off. Here are a few ways to keep in good records and avoid charge-offs:
- Negotiate a payment plan. Most creditors prefer working with you on a flexible payment plan than getting nothing at all. If you face financial difficulty, get in touch with your creditor before the next payment date.
- Create a working budget. Come up with a realistic monthly budget depending on your goals and bills. If possible, save for emergencies that cover six months of living expenses.
Lasting Impact of a Charge-Off
Having a charge-off is a significant financial misstep and will severely impact your credit score. Not only will it take seven years for you to recover, but your credit score will take successive hits every month you miss a payment.
There is a good chance that by the time you get a charge-off, your credit score will have already dropped a great deal. Even if you clear the outstanding balance, the delinquency lingers on your report for seven years. However, the adverse effects of a charge-off reduce with time, and you have a chance of rebuilding your credit score over the period.
As you put in the effort to increase your credit score, some lenders will frown on the presence of a charge-off on your records. This can deny you loans or elevate interest rates. Therefore, you need to avoid a charge-off as much as possible.
Naturally, you don’t want to see a charge-off on your credit report. While personal finance can seem extremely complicated, there are ways to navigate it confidently. Breaking free from charge-offs that are already in the credit report is a challenging task, and it’s best to pay your debts and bills on time. If you happen to have a charge-off, you can try the several ways mentioned above to remove it from your credit report. Overall, a charge-off isn’t good, so try to avoid it by all means.
Lydia Kibet is a personal finance writer.