What is a charge-off?
A charge-off doesn’t mean you’re off the hook — and it can do serious damage to your credit score.
If you see a charge-off on your credit reports, it’s likely because your creditor has deemed that account a total loss. But you may be able to reverse the charge-off if you act quickly.
Charge-offs on credit reports explained
A charge-off means that a creditor has closed an account. But a closed account doesn’t mean the debt is gone — it means the creditor has given up on attempting to collect and has deemed the account a loss, which typically happens after 180 days or six months of nonpayment.
Once an account is charged off, its next destination is likely a debt collection agency. Creditors often sell their charged-off accounts to debt collectors so they can attempt to collect the amount owed. If you have a recent charge-off on your credit reports, you may see a collection account on your credit reports soon.
How much can a charge-off affect your credit score?
Charge-offs can severely harm your credit score. You could see a drop anywhere from 50 to 150 points depending on your overall credit history and current score. A charge-off remains on your credit reports for up to seven years.
They also don’t look great. With a charge-off in your history, a lender may see you as an at-risk borrower. And since charge-offs often happen due to multiple missed payments, your credit score is likely hurting from those as well.
What happens if it’s sent to collections?
If a charged-off account is sent to collections, you’re looking at another negative mark on your credit report. You may see another 50- to 100-point drop per collection account, depending on your credit history. From there, you’ll probably have to work with the debt collector to resolve the account, as it’s no longer in the creditor’s hands.
Should I pay a charge-off?
Even though the account is charged off, you’re still responsible for the amount. If you’re able, pay off the balance as quickly as possible. Paying it off before it’s sold to a collection agency can prevent further damage to your credit score.
How to reverse a charge-off
You can attempt to contact the original creditor for a solution. A common solution is called a pay for delete, which means you tell the creditor you’ll pay the charge-off account if they agree to remove the negative mark from your credit report.
Keep in mind that you’ll likely need to pay in a lump sum for this to work, and the sooner, the better. While you may get away with negotiating for a lower amount — such as 50% of the amount owed — there’s a good chance you’ll need to pay all or most of the debt to get a creditor to agree to remove the charge-off from your credit reports.
However, if the creditor has already sold the account to a debt collection agency, you may have to contact them for any settlements. If the charge-off is recent, contact your creditor quickly before it’s sold to collections to avoid further credit score damage.
How to repair credit after a charge-off
The first step would be to resolve the charge-off by paying it if possible. Some creditors may not allow you to enter a “pay to delete,” and if it’s sent to collections, you’ll likely have to talk to the debt collector for resolution.
Borrowers who repay accounts in collections can see an increase in their credit score, according to FICO. So, while the negative mark of charge-offs or collections can harm your credit score for up to seven years, the impact of negative marks lessens over time, and paying it off can help improve your credit score.
If you can’t repay the charge-off, you can wait for it to fall off your credit reports, but it’ll take years. And there’s a good chance a debt collector will contact you.
Whether you’re trying to save up to pay off the charge-off account or you’re in the process of negotiating, you can still focus on other pain points in your credit history. Focus on building your credit by paying all your other bills on time, review your credit reports frequently and look for other credit-building opportunities with a low risk of accumulating debt.
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