Beginner’s Guide: Understanding Charge-Off Accounts

Sometimes reading your credit report can be incredibly confusing. One of the most confusing phrases you can find on a credit report is “Charge-Off.” I remember the first time I was looking over my credit report and saw charge-off, I had no clue what it even meant. If you have struggled at any time in your life to make payments on time, there is a good chance you may have an item on your credit report that has those two infamous words.

I remember thinking when I first saw it on my report, sweet, I don’t need to worry about this one. My rationale told me that most likely it had already been taken care of, been paid off, or was eliminated. What I didn’t know was how bad it really was to have it showing up on my credit report. I ended up not even being able to qualify for an auto loan because of the charged-off accounts I had being reported on my credit report. I was seeing just how much trouble it was causing me and that is the last thing I want to have happen to anyone else. This guide will hopefully help you gain a better understanding what a charged-off account is, and just how it affects you.

What is a charge-off?

So what is a charge-off exactly? Money collectors, or creditors, like any other business have what is called “Profit and Losses.” A creditor’s success is all based on the people they loan money to, paying their bills on time, and collecting interest on those loans. This is considered “Profit.” Of course, this means that the lost revenue is because people fail to pay their bills over a period of time, or not paying back the debt at all. The creditors classify this as a “Loss” and will “charge-off” the debt. This means the creditors write it off, mainly for tax write-offs.

How long do charge-offs stay on your credit report?

Just like most of the negative items on your credit report, a charge-off can be reported on your credit report for up to seven years from when the account was charged-off. This can drastically impact your credit scores, even if you only have one account with a charged-off status.

When do the creditors report it as a charged-off account?

Most creditors report revolving debts as charged-off after 180 days late on your payment. However, you may find that if you are late on your mortgage payment, or a line of credit, your account could be reported as a charge-off around the 120 day mark. Having a charge-off on your credit report is classified as one of the worst negative items you can have on your credit report, and can make the approval process for credit incredibly difficult to get. Then on top of that, your creditor could sell off your account to a collection agency, and their aggressive tactics to collect on the debt.

Will paying the charge-off help my situation?

It is best to understand that paying your charged-off won’t necessarily give you an instant boost on your credit score. A paid charge-off is better to have than an unpaid charge-off. However, even paid charge-offs are a blemish to your credit scores.

What can you do?

Unfortunately, it isn’t easy to get a charge-off removed. There are some things you can do to minimize the damage, and it is best to understand when you should or when you shouldn’t pay a charged-off account.

When to Pay the Charge-Off

Paying off a charge-off is going to hinge on one major fact; that the charge-off is actually yours to pay. If you have verified that the charge-off does in fact belong to you, then here are a few examples of when to pay the charge-off.

  1. When the charge-off is new
    The quicker you can catch it the better. One way or the other, you will still see your credit score take a hit. The higher your score the more points you could have taken off of your score. When the charge-off is new, you may be able to arrange the payment to be made with the condition that the negative mark is removed from your credit score. You may not be successful every time, but you will have more success if done earlier in the process.
  2. When you need to qualify for a home loan
    Some of the mortgage companies I work with require their clients to have all outstanding debts taken care of before they will approve a loan. This could be a civil judgment, tax liens, and of course the charged-off accounts. I remember that when my wife and I were in the process of purchasing our home, I had a charged-off account pop up, and we needed to take care of it prior to being able to close on our home.
  3. When the creditor will delete the charge-off
    Some creditors will delete the charge-off when you make a payment in full, versus settling the account for a lesser amount. When I was repairing my own credit, I remember paying the account in full, and also negotiating with the creditor or collection agency to pay a percentage of the actual debt.

When to NOT Pay the Charge-Off

  1. The charge-off is past the statue of limitations
    This will vary for every single person based on the state they live in. This is because the law in each state is different. To see the statute of limitation for your state, click here.
  2. When you aren’t sure you owe the amount listed
    I had one collection agency tell me that I owed all of these late fees and interest. Luckily, I still had the agreement with the company I had obtained the credit from and it clearly stated in the agreement that if my account was sold off to a collection agency, I would not have to pay any additional fees. Of course, this isn’t always the case, so be sure you keep good records of the agreements you enter into. It could also be that you have paid the debt already. If you have any proof that the debt had been paid, provide it to the collection agency and the creditor.
  3. When the charge-off is listed with more than one company
    As mentioned before, sometimes your account can be sold off. This can happen multiple times, and each of the companies may be showing the charge-off for each account. These companies don’t have any documentation, other than maybe a spreadsheet with your name, amount owed and your address/contact information. If you see the same account being reported multiple times, be sure to verify the debt prior to paying, before you pay some debt collector that doesn’t even own the debt anymore but are happy to take your money.

Million Dollar Question: Can Charge-Offs Be Removed?

The answer to the million dollar question, is that charge-offs can be removed from your credit report. There are several ways we can have them taken off of your credit report.

Dispute with the Credit Bureaus

By law, the Fair Credit Reporting Act (FCRA) allows you to dispute any item on your credit report that you find questionable or you know the item doesn’t belong to you. The credit bureaus by law are then required to verify the account and do the research necessary to prove it belongs to you. If they cannot prove that it belongs to you, then by law, they are required to remove it.

Pay to Delete

Most collection companies purchase the debt for pennies on the dollar. You may find a creditor or collection agency willing to settle for a lesser amount than you owe. Just be sure that, if you are going to do the pay for delete option, that you get everything in writing and create a paper trail.

Conclusion

I think it is safe to say that the best option is to be sure you are making your payments on time. Charge-offs actually mean trouble for your credit scores and your financial future. Be sure to monitor your credit report on a regular basis to ensure you catch any of these items that may be reported on your credit report. Don’t make any moves to pay off a charge-off until you have verified that the account is yours, and for the amount that needs to be paid. Work as hard as you can to negotiate with the collection agencies to have the charge-off completely removed from your credit report or even re-aged prior to paying the debt in full. And most important, get it in writing before you pay. And if you need any help, hire a credit repair specialist to assist you.

Please note: I reserve the right to delete comments that are offensive or off-topic.

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