Explaining Charge Offs on Credit History Reports

Explaining Charge Offs on Credit History Reports

What does it mean when you see a credit card account charge off on your credit report?

So, if you are like me, you recently got your free credit report and while perusing through it you may have seen the words ‘charge off’ after an account or two. So, what does charge off mean? The simple answer is that it means the creditor to whom you owe the debt has decided to no longer pursue you, in an attempt, to collect the money owed to them. Sounds like a good thing, right? Not necessarily and here is why. Please, keep reading.

What happens when a creditor charges off an account?

Like I said early, a creditor will charge off the debt you owe them after failing to make your minimum payments, usually after several months, anywhere from 120-180 (months not days) typically. Basically, the creditor is giving up chasing after you. They will just classify your account as a bad debt, and it will appear as a loss on their profit / loss financial sheet. Once this happens, they will officially close your account and move on from. This sounds like a good thing, but do not start jumping for joy just yet.

Am I still responsible for the debt after it has been charged off?

You may very well be (I warned you not to start the celebration)! After your account has been charged off, the original creditor may then transfer (or sell) that account to everyone’s favorite industry, debt collection! There is considerable debate, however, on whether or not you would owe a collection agency that has bought your debt any money. But that is an answer for another question in another blog.

The fact remains though the even though the original creditor has charged off your account with them, it does not really mean that the debt has been forgiven let alone forgotten. If they haven’t sold off your bad debt to a collection agency, their collection efforts may take one more swing at you, that being suing you in small claims court.

To relieve this debt after it has been charged off you can try to agree to a settlement with the original creditor, file for bankruptcy, or roll the dice and hope the statutes of limitation in your State runs out before they take you to court.

How do charge offs effect my credit score?

Once a company classifies your account as a charge off your credit score can take some serious damage. Sadly, charge offs can be one of the most egregious offenders to your credit score. Even one missed payment or a late payment can affect your credit score, sometimes lowering it as much as 100 points depending on the type of account the payment was intended for.

Remember, the biggest factor comprising your credit score is payment history. That is why late or missed payments hurt your score so much. And, in fact, with a charge off, you get hit with both; late and missed payments for that account! With charge offs it may take as long as three years to recoup the points lost on your credit score.

How long do charge off accounts remain on my credit report?

Charge offs can also remain on your credit report for up to seven years, making it incredibly difficult to raise your score over that time frame. I do not want to even imagine how incredibly difficult it would be to raise a credit score with multiple charge offs. If you do have more than one charge off on your credit report, the thing to remember is that date of your last missed payment on each charged off account is when the seven-year timeline begins for each account. There is one saving grace to this process and that is that the seven-year timeframe does not reset if the debt is moved into a collection agency. The big glaring negative to all this is that the timeframe will reset if you make a payment to that debt collection agency (or original creditor). One final remark on this, if you have multiple charge off accounts and make a payment on one of them (whether intentionally or not), that payment only resets that particular account and does not effect the seven year timeframe of any other charge off accounts on your report.

Can I get charge off accounts removed from my credit history?

Well, yes and no (sorry, I know everyone hates wishy-washy answers). As mentioned earlier, charge off accounts will automatically be removed from your credit history after seven years have passed from the date of your last missed payment. With that being said, it is still a good (no, great) idea to review your credit report every year to double check that those accounts actually are removed from your report! You might as well, remember you get one free credit report from each of the big three credit reporting bureaus.

Another thing to remember is that paying off a settlement that you have agreed to with the original creditor or collection agency does not remove the charged off account from your credit report. It simply changes that account from ‘charged off’ status to ‘charged off-paid’ status. Any way you slice it, charged off-paid accounts will still remain on your report until that magic number of seven (years) has been reached.

There is one way to get a charged off account removed from your credit report without waiting the seven years, and that is by contacting the original creditor and begging and pleading! That is if they a have not sold your account to a collection agency. Collection agencies have no souls or hearts (this is a bit of tongue and cheek sardonicism), so begging will fall on deaf ears for sure. Seriously though, collection agencies are less than willing to just forgive a debt they have bought. They are going to want you to pay the full amount; however, on occasion (when a certain hot region freezes over) the collection agency will be willing to make a deal and take full payment for a percentage of the amount owed.

So, contacting the original creditor and discussing how and what you need to do to have them remove the charge off from your report is a viable option. Most times you may be able to reach an agreement (a lower total balance or a payment arrangement). Besides, it never hurts to ask!