Finding the words charged off on your credit report isn’t good news. It can be scary and confusing when you don’t understand what it means or how it happened. The name itself isn’t helpful either. People often misinterpret the meaning, which can lead to more costly mistakes with your credit.
Learning what charged off means and the impact charged-off debt has on your credit report can help you make informed decisions to get your credit back on track. Here is what you need to know about the meaning of charged off.
What Is a Charge-Off?
Having a charged-off debt means you have not been paying the full minimum payment on money you borrowed for a significant amount of time. Because of the delinquent payments, your debt is re-categorized as “charged off” on the company’s profit-and-loss statements. That means your creditor has given up hope that you will pay them back. The company considers the debt a loss, marks it charged off as bad debt as a profit-and-loss write off, and will either sell or transfer your delinquent debt to a collection agency or a debt buyer.
At that point, one debt may now appear twice on your credit report, compounding the confusion. One debt listing will be from the original company you borrowed money from. The second listing is from the debt collector the account was transferred or sold to. Both accounts will show up as active, which can make it frustrating to decipher.
Does Charged Off Mean Paid Off? Do I Still Owe the Debt?
Having your debt charged off does not mean your debt is paid off. Charged off is often used interchangeably with written off, sometimes leading people to believe the creditor has written off their balance and they no longer need to pay their debts. That is not the case. The company is writing off your debt as a loss for its own accounting purposes, but it still has the right to pursue collection of the past-due amount.
When Will a Charge-Off Happen?
Creditors will first try to send letters to remind you of a past-due bill. If that fails, they move to a collections process. Re-categorization to “charged off” typically happens after your payment is 180 days past due, though installment loans (something along the lines of a mortgage, for example) can be charged off after 120 days of delinquency. The six-month mark comes from a generally accepted accounting principle that determines 180 days to be the point after which receiving payment is highly unlikely.
It is important to note that debts can be charged off even if payments have been made, providing that all of the payments were below the account’s monthly minimum. Once the debt is charged off, the delinquency is reported to credit agencies.
How Does a Charge-Off Affect My Credit Report?
A charge-off will be bad news for your credit report. Because a charge-off comes from missing payments, you will have late payments and a charge-off listed on your credit report. Negative information such as those lead to a lower credit score. In fact, late and delinquent payments have the largest impact on your credit score: up to 35% of your score is determined by your payment history. And a lower credit score can cause everything from higher insurance rates to larger utility deposits to being denied credit.
How Long Does Charged-Off Debt Stay on My Credit Report?
Just like late payments, a charged-off account will remain on your credit report seven years from the date of the last scheduled payment before the account went delinquent. The time period does not start over again if the debt is sold to a collection agency or debt buyer. After the seven years, the charged-off account will automatically be removed from your credit report.
What Should I Do if I Have a Charge-Off?
The best thing to do is to pay the balance of your charged-off debt in full. Once paid, the report will show “paid charged-off.” It won’t remove the charge-off from your credit report, but it will show you are making an effort to resolve the negative account.
If you are unable to pay the debt in full, create a budget to find extra money to pay down the debt quicker. Paying your other debt on time each month is another great way to improve your credit report.
If you want to avoid having any of your accounts charged off, the best thing to do is take preventative measures. Learn and maintain positive financial habits and avoid living outside your means. Look into automating your finances as well to make sure you don’t miss any payments on your cards and put yourself at risk for getting charged off.
And don’t forget to check your credit report at least once a year to make sure everything is accurate and being paid. If you want to check your progress more often, you can get a free credit report summary, updated monthly, from Credit.com.
Source: Leonard & Reiter (2013). Solve Your Money Troubles, Debt, Credit & Bankruptcy. Berkeley, CA: NOLO