August 26, 2024

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

Have you ever wondered what happens when you don't repay a debt?

When a lender believes a debt won’t be paid back — often when 180 days go by with no payment — they might consider it a loss and write it off.

But a lender writing off debt doesn’t mean you aren’t responsible for paying it back. Many lenders sell or contract out uncollected debt to third-party collection agencies to try to get paid. You’ll still be on the hook to pay back the money.

Luckily, there are ways to avoid reaching this point with your debt. Here’s more about what a charge-off is and why they matter.

How does a charge-off affect your credit score?

A credit score is a number that represents your past relationship with debt. Payment history is a crucial factor in calculating a score, and missing even one payment can lower yours.

A charge-off means you’ve missed enough payments that your lender no longer believes you’ll pay back the debt, which is much more serious than one missed bill. If you have a debt charged off, expect your score to drop a lot.

These usually appear on your credit report for seven years, continuing to drag down your score, even if you manage to pay off the amount.

How to avoid charge-offs: 4 tips

There are many reasons why you might struggle to make progress paying down your debt — but failing to make any contribution leads creditors to believe you’re abandoning it entirely. Here are four tips to help you avoid charge-offs.

Schedule payment reminders

Find a way to set reminders to make payments each month. Your bank or creditor might allow you to set these up, but if not, add a to-do to your personal calendar or reminders app.

Do your best to make at least the minimum payment each month. That communicates to creditors that you're working on paying off your debt, even if your progress is slow.

Contact your creditors first

When it looks like you have to miss a payment or default on your debt, contact your lender to explain the situation. Creditors want to receive payment, not have your owings charged off as bad debt.

Communicate that you’ll miss a payment ahead of time. You can try to adjust your due date or work with creditors to create a payment plan that’s more reasonable for you to meet.

Create a budget

Creating a budget lets you plan where your money goes every month to cover your essential expenses, including debt payments. It might seem like making a budget is a small step, but when you plan to put a certain amount toward your monthly payments, you won’t be scrambling to find a way to pay your bills at the end of the month.

Use EarnIn’s personal loan calculator to see a breakdown of your monthly payments. You can adjust your inputs to check how much more interest you’ll pay if you negotiate a longer payment plan.

And with EarnIn’s Cash Out tool, you can worry less about missing due dates because you’re waiting for a paycheck. Instead, you can access your pay as you work — up to $150/day or $750/pay period — to make every day payday, with no interest, no credit check, and no mandatory fees.

Track your finances

Creating a realistic budget means you need to know where you spend your money each month. Track your expenses to learn what you need to budget in certain areas and where to reduce spending. You might find, for example, that your grocery spending is low but you eat a lot of takeout on workdays. Making an effort to spend less at restaurants and more on packing lunches. This can help you cut spending and free up some cash to put toward your debt.

How to remove charge-offs from your credit report

If you're in a situation where a bad debt has hit your credit report, it’s okay — there are some ways to remove charge-offs from your credit report or at least lessen their impact.

Dispute inaccurate information

Regularly request your credit reports from the three major reporting bureaus — TransUnion, Equifax, and Experian — to make sure your payment history is reported properly. You get one free report from each bureau every year, which you can request to check for accuracy.

If you find inaccurate information, file a dispute with the creditor and credit bureaus like TransUnion, Equifax, and Experian. Creditors and credit bureaus are required to fix any inaccuracies reported.

Negotiate and pay it off

Although it might not be possible, the best way to remove a charge-off is by paying it off in full. Contact your creditor to negotiate a pay-for-delete agreement. With these agreements, the creditor will usually remove the charge from your credit report once the debt is paid, helping your credit score recover faster.

You can also settle your debt, which means negotiating with the lender to pay a smaller amount than initially borrowed in exchange for clearing the entire debt.

Paying a charge-off in full looks better to future creditors and helps rebuild your credit quicker, but settling resolves the entire debt for a smaller lump sum payment, making it a more affordable option.

If a collection agency buys the debt, the charge-off will remain on your credit report, even once paid. But it will still show as paid or settled on your report in the future, proving to future creditors that you took action.

Wait it out

Charge-offs drop off a person's credit report after seven years, regardless of how much of it was paid off. Credit scores also generally increase over time, as long as there isn't new bad debt continuously dragging them down. If you don’t have the means to pay off the sum and can’t reach a deal with your creditor, you might need to sit tight until it’s off your report.

Frequently asked questions

Can I remove a legitimate charge-off from my credit report?

You can’t remove the charge-off from your credit report if it’s accurate. It will fall off your credit report seven years after the first missed payment.

How much will a charge-off lower my credit score?

A charge-off can significantly lower your credit score, potentially by over 100 points, as it represents a failure to repay a debt.

Can a creditor still try to collect after a charge-off?

Even after a debt is charged off, the original lender or a debt collection agency can still attempt to collect your unpaid balance.

Will paying off a charge-off help my credit score?

Paying off a charge-off debt can help improve your credit score, as it will be updated to show the charge-off was paid or settled. However, the negative mark typically remains on your report for seven years.

Should I pay a charge off in full or settle?

The answer to this question depends on your financial situation. If you can pay off the debt in full, your credit score should recover quicker and you won’t need to worry about the debt being sent to collections. But if paying the full balance isn’t an option, settling can help you find a more affordable way to pay off the loan and start rebuilding your credit sooner.

Keep an eye on your credit with EarnIn

It’s challenging to improve your credit without knowing what it is. EarnIn’s free Credit Monitoring tool helps you stay informed about your score and monitor your credit usage without any hard or soft credit checks.

And if you need access to funds, whether it’s for a bill payment or an unexpected expense, skip predatory payday loans or cash advances with steep interest rates, and access your wages within minutes of earning them with the Cash Out tool.

Take control of your finances today with EarnIn.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.

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