What is a charge-off?

It’s a derogatory credit report entry for a long-delinquent debt

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When debts go unpaid for a long enough time, creditors usually give up and "charge off" the remaining balance. This means they are willing to take the unpaid debt as a loss and move on with the debt likely being sold to a collection agency.

While charging off a debt may be a good move for creditors that want to get losses off their books, charge-offs are bad news for consumers who care about their credit and want to avoid being hounded by a debt collection agency. For that reason, charge-offs are best avoided if at all possible.


Key insights

  • A charge-off is when a creditor gives up on getting paid back and writes off a debt as a loss.
  • A charged-off debt doesn’t disappear for the consumer. Charged-off debts are typically sold to debt buyers and debt collection agencies.
  • There are few ways to get a charge-off removed from your credit reports, but there are steps you can take to reduce their impact.

Charge-off meaning

A charge-off takes place when a creditor deems an account delinquent and unlikely to be paid.

While creditors have different internal collection policies as to when they charge off an account, most typically charge off unpaid debts at around 120 to 180 days past due. Before that, they’ll send letters and notifications once a first payment is missed, and may even call you to remind you of the past due amount before the account is moved to collections, according to Equifax.

However, creditors may choose to charge an account off earlier than that if they have lost contact with the debtor, says Loretta Roney, CEO of InCharge Debt Solutions.

"So, it is important that if you are trying to avoid an account getting charged-off that you stay in touch with the creditor and try to make small or even partial payments,” she said.

Charge-off vs. collection
The term charge-off is used to describe the actions creditors take when they give up on a debt and write off the debt as a loss. From here, creditors typically sell the debt to a debt buyer or collection agency, which then tries to collect the debt.

Limitations apply to the strategies debt collectors can use to collect on unpaid debts, thanks to the Fair Debt Collections Practices Act (FDCPA) . For example, collection agencies cannot harass you or make threats. You also have the right to request a collection agency to stop contacting you.

Charge-off vs. cancellation of debt
There are some scenarios where a creditor will cancel the debt you owe, usually through bankruptcy , debt relief programs or direct negotiations . Cancellation of debt is unique from a charge-off since the creditor is agreeing to release the debt versus writing it off due to nonpayment.

That said, note that the IRS considers canceled debt to be taxable income when the amount is $600 or more.

» MORE: What is debt forgiveness?

How does a charge-off affect your credit?

Imagine a scenario where you lost your job and the bills are beginning to pile up. At this point, you are trying to decide what to pay and what kind of impact this will have on your overall credit.

Payment history makes up 35% of your FICO score, including whether you pay your bills on time or at all. Just like a late payment will hurt your credit score, a charge-off causes a dramatic impact to your credit score that can take years to fix. In fact, Roney said your credit score could drop by 50 to 150 points right off the bat once a charge-off is reported.

How long does a charge-off stay on your credit?

Negative information (like charge-offs) stays on your credit reports for seven years. This means the charge-off could haunt you and make life harder and more expensive for years after it takes place.

"The farther you get out from the date of first delinquency, the less of an impact it will have on your overall score," said Roney. "One thing to remember is that it's not just your score that it will affect, but also your ability to establish new credit or the high interest rates you will pay on future loans."

» MORE: How to check your credit score

How to remove a charge-off from a credit report

There are minimal ways to get a charge-off removed from your credit reports, mostly because the Fair Credit Reporting Act (FCRA) requires creditors and other companies to report credit information that is accurate and truthful. So, if a charge-off is accurate and truthful, it's going to stay on your credit reports for seven years.

This is true regardless of what credit repair agencies promise. Many credit repair firms say they can get negative information removed from credit reports, along with making other claims, but these companies do not have the power to remove accurate information, and they cannot do anything for you that you cannot do yourself.

That said, there are a handful of strategies you can use to try to get a charge-off removed, or to lessen the impact.

Pay for delete

Pay for delete is when collection agencies or creditors remove negative credit reporting in exchange for you paying down the account. The key here is that you'll need to pay off all or most of what you owe to make this happen.

However, the success rate for pay for delete is very low. In fact, most creditors and collection agencies won't negotiate for these kinds of terms since removing true information from credit reports goes against the requirements of the FCRA.

Pay off the unpaid debt

Roney said that you can also pay off an unpaid debt — although paying off a charge-off that is several years old may not improve your credit score right away. Even so, paying off a charged-off debt shows future creditors you are willing to come back and pay what you owe even if you struggled for a while.

"This can help you as you apply for credit in the future," she said.

» COMPARE: Best credit report sites

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    FAQ

    What does a charge-off mean on your credit report?

    A charge-off listed on a credit report represents an unpaid debt that a creditor has given up on. This usually happens after a debt goes unpaid for at least 120 to 180 days, although timelines vary.

    How can I get a charge-off removed without paying?

    You cannot get a charge-off removed from your credit reports in most cases — especially if you're unwilling to pay back all or part of what you owe.

    When does a charge-off go away?

    Negative information like late payments and charge-offs stay on credit reports for seven years.

    Bottom line

    A charge-off may mean a creditor has given up on being paid back, but it doesn't make the debt disappear. If anything, a debt that has been charged off just moves to a debt buyer or collection agency, which will continue trying to collect the debt. In addition to leaving you hounded by debt collectors, a charge-off also causes considerable damage to your credit score.

    Our advice? Avoid letting a debt move to charge-off status altogether if you can. Try to find a way to get current on your bills instead, and work directly with your creditors to negotiate a payment plan the minute you feel you're at risk of falling behind.


    Article sources
    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Equifax, " What Is a Charge-Off? " Accessed Sept. 27, 2023.
    2. Federal Trade Commission, " Fair Debt Collection Practices Act ." Accessed Sept. 27, 2023.
    3. IRS, " About Form 1099-C, Cancellation of Debt ." Accessed Sept. 27, 2023.
    4. myFICO.com, " What's in my FICO® Scores? " Accessed Sept. 27, 2023.
    5. Federal Trade Commission, " Consumer Reports: What Information Furnishers Need to Know ." Accessed Sept. 26, 2023.
    6. Lexington Law, " Pay for delete letter template + sample for credit repair ." Accessed Sept. 26, 2023.
    7. Consumer Financial Protection Bureau, " How long does negative information remain on my credit report? " Accessed Sept. 26, 2023.
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