What is a Charge-Off and How Does it Impact Your Credit Score?

The jargon used by creditors can be just as troublesome as that used by lawyers. Things are not always as they seem, and it is important to know the specifics of any credit situation to avoid undue stress. If a creditor informs you of a charge-off imposed on your account, it does not mean that they have decided to cancel your charges out of the goodness of their hearts. If only, right?

In reality, a charge-off means that the creditors have labeled your debt as a financial loss for the company. It is akin to a foreclosure in the mortgage world, but because credits are unsecured debt (there is nothing the company can take back from you when you don’t make the payments), they simply mar your credit so that you cannot do it again. This negative mark is placed on your credit report for seven years. Generally an account is charged-off after six months of either less than minimum payments or no payments at all.

There are ways that you can repair your credit after receiving a charge-off. The best way to do this is to pay the debt – but only after contacting the lender and obtaining an agreement (preferably in writing) that they will change what they’ve reported to the credit bureaus upon receipt of the payment. Because a charge-off is an indication that you either did not have the means to make reliable payments or simply were irresponsible with your commitment, it will make it much more difficult to get credit in the future.

Fortunately, once the debt has been paid in full, the charge-off will be updated to a “paid” or “settled” mark, and if you can negotiate with the creditor, it may be removed entirely before the 7 years is up. Unless you can find a way to repair your credit, you are stuck with a lower rating that can impact everything from the interest rate you get on future loans to the cost of your monthly car insurance.

The best course of action is to avoid a charge-off entirely. Do your best to make more than minimum monthly payments every month, but at the very least, make the minimum payment on time. Talk to your creditor about any struggles you may be having. They do not want to admit financial loss any more than you want a negative mark on your credit, so it is likely that an agreement can be reached. There are also several tools available to help with credit repair. With dedication, you can soon rid yourself of debt completely.



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