If you’ve recently fallen behind on loan or credit line payments, you may have been told that your account will soon be charged off. If you’re wondering what that means and what you need to do about it, you’ve come to the right place. We’ll tell you what a charge-off is, how it could impact your credit, and your best course of action, depending on your situation.
A charge-off happens when you’ve failed to make payments for several months consecutively, and a creditor determines that you are no longer likely to pay off the debt. It’s essentially writing you off as bad debt. The account is then listed on your credit report as a charge-off. Typically, this occurs after six months of missed payments but can happen as early as four.
A charge-off hurts your credit score and will give lenders pause when considering you for a loan. The good news is that a charge-off is not a sudden thing. You will likely receive regular contact from your creditor through multiple forms of communication, letting you know you are falling behind on your dues and warning you of a potential charge-off.
If you’re able, this is the best time to address this unpaid debt with your lender. You can opt to pay your past due amount, or if that isn’t financially viable, you can get in touch with your creditor and see if they would be willing to set up a payment plan for you. Either way, you should act quickly to prevent a charge-off from becoming part of your credit history.
If you missed the window between previous payments and a charge-off, you’re probably asking, “Should I pay a charge-off?” The answer to this will vary depending on your situation.
The first thing to know is that paying it does not automatically remove it from your credit report or even make an enormous impact on your score. That’s because most of the damage done to your credit score results from the missed payments leading up to the charge-off. The account will, however, be marked as a paid charge-off, which can help sway some lenders depending on the rest of your credit history.
In some cases, a creditor might agree to remove the charge-off from your report in exchange for restoring your account to good standing, but they are not required to do so. If they are willing, however, this is the best-case scenario for getting your credit back on track.
However, there is one major caveat when paying a charge-off: it may be too late. That’s because when most companies charge off a debt, the next step is to sell that debt to a collection agency.
While charge-offs and collections are closely related, they’re not the same. Once an account is charged off, a creditor can (and usually does) choose to sell it to a collection agency. You will know this has happened because the balance of your charge-off will drop to zero (though the charge-off itself will remain), and you will see a new mark on your account listing the collection agency and the amount of your debt.
At this point, any further communications must be done through this collection company, and there is no longer any way to remove the charge-off from your report until it falls off on its own.
If you cannot pay your debt, you may wonder if you can simply wait it out. So how long does a charge-off stay on your credit report? The short answer is seven years. However, if that debt has gone to collections, this is not necessarily the end of the story.
While the report of a collection should also fall off your credit history in seven years, your debt can still be collected. In some states, collection agencies can still sue you for the debt as much as fifteen years later. Furthermore, the countdown restarts if you speak with a representative and acknowledge the debt or make a promise to pay over the phone.
Like most things that involve keeping your credit score healthy, an ounce of prevention is worth a pound of cure. If you can pay your debt before it reaches charge-off status, you can quickly get to work rebuilding your score instead of being stuck with bad credit that could haunt you for years.
If you need help getting your finances in order or need a financial boost, Bell Finance may be able to help. Contact us today to see what we can do for you.
