Charge-Off

Charge-Off
A charge-off occurs when a lender removes a debt from their accounting books because it’s extremely past due. The lender absorbs the cost of the outstanding debt and doesn’t pursue payment, but the borrower is still legally responsible for the amount that’s owed.

What does “Charge-Off” mean on a credit report?

When borrowers see “charge-off” on their credit report, it means the lender has charged-off the debt they owe on a particular loan and reported it to the credit bureaus—Equifax, Experian, and TransUnion.

What does “Charge-Off” mean on a credit report?

A charge-off occurs when a lender assumes that a borrower won’t repay a debt. This typically happens after the borrower misses payments for at least six months in a row.1 The lender removes the debt from its books and discontinues efforts to seek repayment. At that point, the lender has two options: one, absorbing the outstanding balance as a cost of business; or two, selling the debt to a collections agency. If the lender sells the debt, the collections agency will pursue payment from the borrower.

Legally, a borrower is still responsible for paying the outstanding balance on a charged-off debt until the outstanding balance is settled, discharged, or resolved in a bankruptcy proceeding. While some lenders may not pursue payment, the charge-off will be recorded on the borrower’s credit report, which can have serious implications for future borrowing ability.

How does Charge-Off affect a borrower’s credit score?

A charge-off can be pretty bad for a borrower’s credit score. Aside from the damage to the score itself, lenders review the larger credit report and a charge-off is considered a serious infraction. Lenders may overlook late payments if a borrower eventually paid off the debt, but most are less likely to tolerate a loan that was never repaid.2 In addition, by the time a lender charges-off a debt, the borrower’s credit score has likely already suffered damage due to the missed payments leading up to the charge-off.

How long does a Charge-Off stay on a credit report?

A charge-off will stay on a borrower’s credit report for seven years.3

How can I remove a Charge-Off from my credit report?

If you can’t pay off the balance on a debt that’s been charged-off, consider contacting your lender. Even if your debt has been sold to a collections agency, the original lender—not the collections agency—are the ones who report write-offs to credit bureaus and are the only ones who can erase them. If borrowers prove that they have the ability to pay back the debt and commit to doing so through a payment arrangement, the lender may remove the charge-off from their credit report.

References:

  1. Irby, L. “How to remove a charge-off from your credit report.” TheBalance.com. Retrieved on January 28th, 2017 from https://www.thebalance.com/how-to-remove-a-charge-off-from-your-credit-report-960360
  2. Bucci, S. “Debt charged off—do I still have to pay?” BankRate.com. Retrieved on January 28th, 2017 from http://www.bankrate.com/finance/debt/debt-charged-off-still-pay.aspx
  3. “Charge Off.” Experian. Retrieved on January 28th, 2017 from http://www.experian.com/blogs/ask-experian/category/credit-advice/report-advice/report-details/charge-off/.