Charge-Off FAQs - American Credit Foundation

Charge-Off FAQs

Charge-Off FAQs

If your credit is in good standing and you don’t fall behind on your debt payments, you might never encounter the term “charge-off.”

But if you fell behind on payments for a credit account, your lender might contact you to inform you that your debt has been charged off.

Hmmm… this sounds innocuous. So is this a good thing or a bad thing? Let’s discuss what a charge-off means for you – and how it impacts your credit.

Q: I’ve never heard of the term “charge-off.” What does it mean?

A: This means that you’ve consistently missed payments, to the point where your credit lender no longer believes that you will repay your debt. As a result, your lender has written the account off as a loss and closed your account to any future charges.

Q: Does this mean I no longer owe the debt? Great!

A. Unfortunately not. It’s still your debt – which means you’re legally obligated to repay it. If your lender sells or transfers the debt to a collections agency, you’ll need to start making payments directly to the new holder (whether that’s a collection agency or a debt buyer), not your original lender.

Q: I’m not that late on my payment… When should I expect a charge-off?

A: Charge-offs typically occur between 120 and 180 days after you’re delinquent (i.e., you haven’t made a payment). Most lenders send letters or call to give you “one last chance” to sort out your past-due amount before they take the action of selling or transferring the debt. 

Q: I’ve been making some payments. Can my account still be charged off? 

A: Even if you’ve been making regular payments, your account may still be charged off. This is sometimes the case if you’ve been paying less than your monthly minimum amount due. Your lender can write off your debt as a loss because you haven’t been meeting your end of the bargain – namely, submitting your full payment due.

man reviewing his credit card statement

Q: How does a charge-off affect my credit? Why should I care?

A: When your debt is charged-off, a “Charged Off” label will be placed on your credit history. If your lender sells your debt to a collections agency, you’ll also have an “Account in Collections” label – and it may appear twice on credit reports: once from the original creditor and once from the collection agency or debt buyer. Because these notations indicate that you didn’t satisfy a financial commitment, they will show up on your credit reports, along with all those missed payments. And because credit scores are calculated using information from credit reports, your credit score will take a hit. This could prevent you from being able to secure future loans.

Q: How long does a charge-off affect my credit?

A: The notation of the charge-off stays on your credit report for up to seven years after the final missed payment. This is just like other negative information on your credit report. 

Q: If I pay the debt, does the charge-off stay on my credit report? 

A: Yes. Repaying the debt won’t remove the charge-off notation from your credit report. But you will see the notation change to “Charge-Off Paid” or “Charge-Off Settled” in acknowledgment of your repayment. Paying the debt before the seven-year period is over will likely have less of a negative impact on your credit score.

Q: I’m not sure what to do. How should I react to a charge-off notice?

A: When facing a charge-off, your first step should be to contact your original lender. Sometimes they will be willing to negotiate a payment plan or settlement. While this might hurt your credit score, it shouldn’t be as negative an impact as the impending charge-off.

Now that you have a better understanding of what your charged-off account means, you might have some questions about how to move forward. Or you might already be dealing with harassing debt collector phone calls or threats of garnished wages. Here’s where the friendly advisors at American Credit Foundation can help. Instead of struggling through your charge-off alone, contact us today for advice on your next steps from a professional financial counselor.