Taking out a loan or using credit is one of the most accessible solutions for many people during a financial emergency. But while it does help alleviate a current financial burden and improve your finances, it can also cause more damages to one’s finances if not managed correctly.
One unfortunate consequence is being unable to pay the debt, along with its interest.
What Does Charge-off Mean?
When you struggle to make payments on credit accounts, your creditor is more likely to charge off your account. The amount you owed would be written off as uncollectible, and your account would be closed and declared as a loss. However, it doesn’t mean you are off the hook.
You still owe the debt, and a charge off could affect your financial goals in the years to come. To give you a heads-up, we’ve highlighted an explanation on how bad credit can lead to a charge off, which in turn, can considerably damage your credit score.
Creditor Reports It To Credit Bureaus
Creditors are not obliged by law to report anything to the credit bureaus. But most prefer to report on-time payments, defaults, credit limits, balances owed, and other information relevant to your credit history.
Unfortunately, having your account charged off is one of the worst things you can have on your credit report.
A charge off would mean that you became neglectful with your debt, and like all other negative marks in your credit report, it can significantly affect your credit scores.
Lowers Your Credit Score
Credit scores are essential numbers that can have a significant financial impact on your life as it quantifies your creditworthiness based on your credit reports.
They can range from 300-850 points and are based on several factors, such as payment history, loan amount, and how you’ve managed your credit.
Payment history encompasses 35% of your total credit score. Thus, the inability to make payments for your debt and prompting a charge-off from your credit provider can ruin your credit score.
Your score can decline by as much as 100 points, even by making a late payment on your account. Therefore, your credit score will significantly drop if you have both a charge-off and late payments listed on your credit report.
Makes A Loan Potentially More Expensive
Generally, you have more chances for better loan terms and lower interest rates if your credit score is high, ranging from 700 and above.
But a lower credit score can cause you higher housing and utility deposits, higher insurance, and interest rates for your loan.
Because a charge off is a negative factor in your credit report, it can take a toll not only on your credit score but also on your chances for better credit opportunities.
Whether you like it or not, lenders will use your credit score to determine what interest rate to give you.
Charge Off as Bad Debt Remains in Your Credit Report
Similar to late payments, a charged-off debt remains on your credit report for seven years. This seven-year clock begins from the original date you became delinquent on debt or the date you first missed a payment.
In case your credit provider sells your debt to a collection agency, your charged-off account would still stay on your credit report for the same period. There is nothing you can do to remove it from your credit report.
But even though a charge-off is considered a negative entry on your credit report, some lenders might view them more favorably if you settle it.
Creditors Are Less Likely To Grant You Credit
Because charge-off results from missed payments, creditors will less likely lend you money once they see it listed on your credit report. Keep in mind that payment history is a critical factor in determining your credit scores.
If your scores are far from good due to a charge-off and delinquent payments, creditors might view you as a high-risk borrower. Your payment history itself is an indicator of how likely you are going to repay debts.
Thus, you may have trouble getting approved for a new loan or credit card for as long as the charged-off debt is listed on your credit report.
What Can You Do If Your Account Is Charged-Off?
It may be tempting not to settle your debt once it is charged off. But as long as it is not paid or discharged in a bankruptcy filing, you are still accountable for it.
While it is best to avoid charge-offs in your credit report, having one doesn’t mean the end for your financial health. Even if your debt is charged off, you must take charge of it.
By paying off the past due debt and other balances, you might still keep everything else in good standing even if your credit score has suffered from a charge-off.
The following are a few things you can do to settle your charged-off account and minimize its impact on your credit score:
Dispute Your Charged-Off Account
Sometimes, a charged-off account is reported in error. It would be best to get a copy of your credit report and review the charge-off entry closely. Examine every detail to make sure that everything is completely accurate.
If you find anything that is not correct, the Federal law allows you to dispute the entire entry with the credit bureau. You can file the dispute online to get credit errors addressed as soon as possible.
The credit bureau will then investigate your claim and correct or remove it if there is an actual error. But note that if your charged-off account is reported accurately, disputing it will not work and help at all.
Negotiate With The Original Creditor
Most often, creditors will hand over charge-offs to a third-party debt collector right after the charge-off date. However, it’s better to negotiate with your original creditor than a debt collection agency.
Another way to negotiate a charge-off removal is to send a pay for delete letter. You’ll have greater success if you address the letter to someone who works in the company than sending it to their general service address.
It should be noted that you don’t have any leverage to negotiate its removal, even if you’ve already paid the charge off unless you get the agreement in writing. That’s why avoid making payment until it is in the written agreement.
But though it may still appear in your credit report, paying off the balance will lower your outstanding debt. It can also positively impact your credit score over time.
Work With A Credit Repair Company
You can also have professional work on credit. Although you can get negative information removed from your credit report, credit repair companies can usually do it faster and more efficiently. It can help you save time, but you’ll have to pay for their fees.
Typically, credit repair companies may have a monthly subscription rate besides the initial set-up fee. But be careful because some of them may ask for money upfront.
They might promise to give you results that seem too good to be true, yet their goal is to deceive people who need help in their credit.
Seek Credit Counseling
You may also consider asking for help from a credit counseling group. They usually give advice on how to manage charge-off debts. With their help, your creditors might be able to cut interest rates and penalties so you can pay your debts within three to five years.
Besides that, they can help you develop concrete to repay your debts. Most importantly, this credit counseling can help you learn how to manage your finances in the future.
If you’ve already done all that you could, your only option is to wait out until the charge-off is removed from your credit report. It would typically take seven years, that is, if you didn’t succeed with the dispute and negotiation.
Even then, continue to pay your bills on time so your credit will improve within that period. Because when your potential creditor sees that you’re taking action to settle your charge-off debts, you can limit its financial impact and move in the right direction again.
A charge-off listed on your credit report will significantly take a toll on your credit score, which can make it harder for you to get approved for a new loan or credit. Thus, it is vital to avoid delinquent debt of any kind.
If you’re in serious financial trouble and cannot make payments, try to contact your creditor immediately. Some creditors offer hardship payment plans that will allow you to make reduced monthly payments temporarily.