When it comes to your credit, one thing you should try to avoid is a charge-off.
A credit card charge-off occurs when your issuer closes your account due to delinquent debt. Charge-offs usually happen when you fail to make a minimum monthly payment for six months in a row. Leaving the balance unpaid can negatively impact your credit score, credit history and chances of getting approved for a loan.
And it doesn’t mean you’re off the hook for what you owe either. “A charge-off does not mean you no longer owe the debt, but generally that someone else will now try to collect it from you,” said Ryan Bannister, a certified public accountant and owner of 1Up Financial Advisors.
Here’s more about charge-offs, what to do if you have one and how to avoid them.
What is a charge-off?
“Charge-offs are when the lender determines you won’t pay your bill. They discharge your owed balance and send it for collections,” said Matthew Goldman, credit card expert and founder of Totavi and author of CardsFTW.
Mortgages, credit cards, and personal and student loans are all examples of credit accounts that can be charged off, said Freddie Huynh, credit expert at Freedom Debt Relief. Creditors typically charge off an account after it’s been delinquent for 180 days and the outstanding balance is deemed uncollectable. It’s then sent to a debt collector to pursue payment. The unpaid balance will appear on your credit report, which can reduce your chances of securing approval for borrowing in the future.
How to avoid a charge-off
“You do not want to have a credit card charge-off. If you are struggling to make payments on your debt, there are steps you can take to avoid a charge-off,” said Brandon Juodikis, founder of BRJ Wealth Management. Here are a few tips if you’re in the red:
- Contact your creditor and explain your situation.
- Set up a payment plan that you can afford.
- Ask for a deferment or forbearance.
- Consider debt consolidation or a debt settlement.
Most importantly, apply for credit sparingly, Huynh said. Only use credit that you have sufficient funds to cover completely by the due date. “Don’t charge what you cannot pay back in full,” Huynh added.
How a charge-off negatively affects your credit
A charge-off doesn’t impact your debt-to-income ratio or your credit utilization rate, which lenders look at to see how much credit you’re using out of your available credit limit. However, once a charge-off is on your credit report, it can lower your score and dissuade lenders from approving you for loans, since it acts as a red flag to future creditors. A charge-off can stay on your credit report for up to seven years.
A charge-off doesn’t erase the debt owed, Huynh said. “The lender -- who is entitled to the full amount of the debt (until the state-specific statute of limitations expires) -- can pursue the debt in full,” he said.
The charged-off debt may appear twice on your credit report: once as reported by the original creditor and then again by the collection agency or debt buyer, who will report your account as “placed or transferred for collection.”
Once the debt is paid in full, the collection account will be updated to “paid collection,” which will at least partially restore your credit score. If you keep ignoring a charge-off on your account, your credit score will go down even further.
What to know if you have a credit card charge-off
If you have a credit card charge-off, there are steps you can take to start repairing your credit score, Juodikis said. Here’s what he recommends.
- Make all of your payments on time going forward.
- Keep your credit utilization low -- experts recommend below 30%.
- Dispute any inaccurate information on your credit report.
- Wait for the charge-off to fall off your credit report, which can take a few years.
Remember that you still owe the outstanding balance. Collection agencies usually buy a charged-off debt for pennies on the dollar and then try to collect the payment by phone or mail. So while you’re practicing good credit habits to improve your score, be sure to tackle that old debt as soon as possible, even if you have to make payments over time. The charge-off won’t disappear from your credit history immediately, but it will eventually.
How to get a charge-off removed from your credit report
A debt management or credit counseling service may help you with a charge-off or other debt concerns. Here are some ways to advocate for yourself and save time and money.
- Check your credit report for inaccuracies. Review your credit report at least once a year for errors. If you find a mistake, such as a loan that shouldn’t be listed as delinquent, dispute it with the credit bureau by providing documentation.
- Pay off your debt. If the charge-off is legitimate, the best solution is to work out a payment arrangement with the original lender or collections agency. Once you’ve made a payment, the status of your account will be changed.
- Negotiate a pay-for-delete agreement. After you’ve paid off your debt, you can contact the original lender or collections agency and ask them to remove the charge-off from your credit report. Though they’re not obligated to do so, they may be willing if you’ve settled your balance.
Once you’ve resolved the issue, focus on paying at least your minimum monthly payments to boost your credit and avoid another charge-off.
The bottom line
Keeping your accounts in good standing is critical to maintain healthy credit. If you believe you won’t be able to make a monthly payment, proactively reach out to your issuer for the best guidance so you can pay down the balance without hurting your credit. But if you see a charge-off on your account, reach out to the issuer or creditor to make sure it’s correct. Then make a plan to pay off the balance as soon as you can. And in the meantime, practice good credit-building basics, like using your credit limits responsibly and making all your payments on time to avoid fees and penalty APRs.
Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.
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