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How a Charge-Off Affects Your Credit (And How To Remove One)

July 28, 2020

You may have seen the word “charge-off” on your credit report, or perhaps you’ve received a letter that your credit application was denied because of a certain “charge-off”.

The word “charge-off” can make it sound as if you’ve been let off with respect to some sort of debt; however, that is not really the case.

What is a charge-off?

A charge-off takes place when the lender anticipates that he will never be able to recover a certain debt.

As a result, they remove that amount from their books of account and document it as a bad debt.

However, it certainly does not mean that the debt has been cancelled by the creditor – the borrower is still liable to pay back that money.

In case of credit cards, if the cardholder fails to pay the minimum amount due for a period of 180 days (or in other words, six consecutive months), then the issuer may charge-off his account.

This means that the cardholder will no longer be able to make purchases using that credit instrument, moreover, he will not get the opportunity to make any more minimum payments on the balance due.

Further, the issuer may send a notification to the credit bureaus indicating that the certain account is charged-off.

Meanwhile, the creditor will continue to try and collect the amount from you – either through its own collection agency or by passing on the account to a debt-collector.

In fact, for a period of several years, you can even be sued for the recovery of that amount (depending on your state’s statute of limitations on debt, of course).

How does a charge-off affect your credit score and access to credit?

When you have an unpaid charge-off on your credit report, it has a negative impact on your score. Usually, the higher your score before the charge-off, the more badly it is affected.

35% of your credit score is dependent on your payment history.

Potential lenders access your credit report to understand how likely you are to return the amount you’ve borrowed, so obviously a charge-off does not bode well for future credit applications.

While a lender may not outright deny you credit, if a charge-off is indicated on your credit report, he will probably charge a high interest rate.

What makes matters worse is that a charge-off notation remains on your report for a period of at least 7 years, so your ability to borrow is impacted for that length of time.

In case you pay off a charged off account, then the notation “paid” appears next to “charged-off” on your credit report.

In other words, paying off a charged off account will not automatically remove the notation from your report until the period of 7 years is up.

However, paying off the account certainly has a positive impact because it indicates to lenders that you are willing to clear up your debts when you get the opportunity to do so.

Bouncing back from a charge-off

The best way to bounce back from a charge-off is to pay the outstanding amount in full.

At the same time negotiate with your creditor and request him to remove that notation from your credit report in return for full payment.

Even if he disagrees, you should still pay off the amount and wait for the mark to fall off after 7 years.

As long as you make all your other payments on time, the effect of that charge-off on your credit will reduce with the passing years.

In case you are unable to pay the entire amount off, you should attempt to get the debt settled by paying off a certain portion.

Often, lenders are willing to accept partial payment and settle the debt for less than the original amount if the borrower requests debt forgiveness due to legitimate reasons like health emergency or loss of job.

Having said that, the best thing is to prevent oneself from falling into such a situation in the first place.

So, while using credit cards, never charge more than you can afford to pay off, make all due payments in full each month, and set up automatic reminders so that you never forget to pay your credit card bill on time.

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