What is a charge-off?

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.

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

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.