If a creditor attempts to collect on an overdue debt for a long time, they may give up on collecting and, instead, close the account. This is called a charge-off. Essentially, the creditor charges off your debt and closes your account. This may seem like a positive option if you can’t pay your debt or dispute that you owe it. However, a charge-off is reported to credit bureaus and can negatively impact your credit score.
If you have debts that you are unable to pay, it is best to contact a debt defense lawyer to discuss your options for settling or repaying the debt, rather than allowing a creditor to charge-off your account.
What Does a Charge-Off Really Mean?
A creditor is most likely to charge off your account if you haven’t made payments in the last six months. As late or missed payments accrue, your account status will change and your credit report will follow suit.
On your credit report, the debt will move from “Accounts in Good Standing” to the “Negative Accounts” section of your credit report. Your report will list how many payments were missed and if the account was charged off.
If the creditor sells the debt to a debt collector, then your account balance will change to zero, but that doesn’t mean you are in the clear. The charge-off entry can remain on your credit report for up to seven years. You will then also have to deal with the debt collector about the debt. A charge-off is not debt forgiveness.
How Much Does a Charge-Off Affect my Credit Score?
Late or missed payments are among the leading causes of a drop in your credit score. Your credit report will indicate the number of payments missed or late, and will divide them into increments. For example, an account that is 30 days past due is derogatory, but one that is 90 days past due will significantly reduce your score.
How much a charge-off affects your score will depend on a variety of factors, including:
- Your credit score before the charge-off
- Number of negative entries on your report
- Overall credit/debt amount
- The scoring system used (FICO, Experian, etc.)
Paying off a charge-off or collections could help your score start to recover, but it will take time. Sometimes it is best to focus on paying open accounts on time every month in order to start rebuilding your credit score.
What is the Difference Between Collections and a Charge-Off?
When a creditor charges off your account, it means they have closed it. Sometimes, the creditor will then sell the debt to a debt collector (a third-party company) who takes over collection attempts. If the creditor charges off the account and does not sell the debt, you will have the negative entry on your credit report labeled as a charge-off. However, if the creditor sells the debt, then your credit report will show another derogatory entry under “Collections.”
If the creditor sells your debt to a debt collector, you will likely know about it very soon. Debt collectors are notorious for sending a barrage of letters and making numerous telephone calls per day. You should know that debt collectors are required by law to follow certain guidelines. If you are harassed or threatened by a debt collector, it’s time to speak with a debt defense lawyer.
Should I Pay a Charged-Off Account?
Ultimately, a charged-off debt is still legally a debt that you owe. Your credit report will reflect if you have paid a charged-off debt or if it remains unpaid. In the future, creditors may respond more favorably to a derogatory account that has been paid off when considering you for credit.
Can I Dispute a Charge-Off?
There are ways you can dispute a charge-off. For example, if the entry on your credit report is inaccurate, you can contact Experian and request they update your credit report. Experian will then notify other credit bureaus of the error and corrections.
You can also dispute the charge-off if you believe it is not legally your debt to begin with. To do this, you should contact a consumer debt lawyer to discuss your options.
Getting Help With a Charge-Off
Finding a charge-off on your credit report can be alarming. You work hard to maintain your finances and credit in good standing. Sometimes, however, things happen that threaten your financial and credit security.
At Daic Law, we understand the frustration and anxiety that you are experiencing. If you have an account that has been charged off, contact us to find out what your options are to fight a debt, relieve the stress of debt collectors, or fight a debt collection lawsuit. Call us at 877-893-6040, email us at info@daiclaw.com, or fill out our online contact form to get started.
