What it Means When You See a Charge-off on Your Credit Report

If you haven’t paid bills in a few months, you’ll need a new vocabulary for the terms you’ll hear and see. Understanding how different debts are classified and the regulations pertaining to them can be overwhelming. Once you have the knowledge to talk with your creditors about what you owe, you’ll feel more confident and less out of the loop. One of these terms you may come across is “charge-off.” You may see this on your credit report after a few months of missed payments. We’ll break down important points about this debt classification so you understand how it affects your finances.

What exactly is a charge-off?

When it looks like a creditor won’t be repaid after six months, they remove the debt from their balance sheet. This classifies the debt as a “charge-off”, or “bad debt”. This doesn’t mean that you won’t need to repay the money. It’s just no longer considered likely to be repaid or they’ve decided to sell your account for a fraction of the total balance owed them. It will still benefit you to pay off this debt, regardless of its new title. 

How can you avoid a charge-off?

As with debt in general, the best way to avoid consequences is to pay your bills on time. That means creating a budget that is within your means and strictly tracking your daily expenses to ensure you live within that budget. To avoid a charge-off specifically, you should pay your debts within about six months of their due date.

Regardless of your financial position, you should never be bashful about contacting your creditors to have a discussion about what is going on. Truly understanding what you owe and when you owe it is crucial to your credit report, but when plans go awry, communication is very important. If you are eventually able to repay your debt, you could negotiate with your creditors to have a charge-off removed. Other payment restructuring also won’t happen automatically -- you’ll need to develop a relationship with your creditor to receive any help.

What happens to your debt after it is declared charged off?

After you miss months of payments, your creditor will close your account. At this point, they have contacted you via your inbox, mailbox, or voicemail, and they have separately sent you a validation notice. This notice lays out everything you need to know about your debt: who it’s owed to, the amount, and how to contest the amount if it’s not yours or otherwise incorrect. After they’ve exhausted means of contact, the creditor will then pass the debt off to a collection agency, who will again be in touch about payments. The agency has within the statute of limitations put in place by your state to work on getting its money back. After that time period expires, the agency can no longer sue you over the debt, and the delinquency falls off your credit report. Each state has their own statute of limitation -- but they all typically fall between 6 to 10 years. Make sure you are up-to-date on the laws applicable in your state.

Are there any benefits to debt being charged off?

If you’re working on negotiating a debt settlement or consolidation, a charge-off can show creditors that you need your debt forgiven. If you demonstrate hardship as the reason behind your missed payments, your chances of forgiveness increase. Again, communication is the only way to state and defend your case with creditors, so keep records of your payments and late notices to have a more informed conversation.

How does a charge-off hurt you?

Any sort of late payment will most likely affect your credit score, especially one that has been building for months and reclassified as a charge-off. And your credit score can’t be instantly fixed, even by paying off your outstanding debt. There will, however, be a distinction on your credit report that shows you paid back the charge-off. This will show your ability to save money and resolve unpaid debts. Your financial actions today will affect your financial possibilities in the future. You may be declined certain loans, credit cards, or rentals if your credit report shows a charge-off. This should incentivize you to pay all, or as much as you can afford at a time, of your monthly bills.