whenever you borrow money, you consent to repay a percentage of the amount (plus interest) to the credit card company or lender each month. You'll have to pay a minimum amount with credit cards, which varies based on your overall debt. In contrast, loans usually require you to make a fixed monthly payment.

But what if you're unable to make your payments on time? Unfortunately, a lot can happen, and most of it won't be positive. When you fall sufficiently behind on a loan, one option a creditor may use is to charge off your unpaid amount.

Definition of Charge-Off

Charge-off is a term that can be a little perplexing. Some individuals think that when a creditor writes off an unpaid debt, it releases you from responsibility for the debt. Charge-offs, however, are distinct from debt forgiveness. You continue to owe the bill even after a creditor charge off an account.

For accounting and tax reasons, a creditor chooses to charge off a debt. The investment made by the creditor (i.e., the debt you owe plus the interest and costs you committed to pay) is no longer regarded as a company asset. When you stop making your payments, that investment becomes a loss for your company.

When A Charge-Off Occurs, THE MONEY

Once your credit obligation is 180 days past due, a charge-off typically occurs.

TELL FACT

When a Debt Is Charged Off, What Happens?

When a creditor discharges a debt on your behalf for tax purposes, it may also report this to the three major credit bureaux (Equifax®, ExperianTM, and TransUnion®). The unpaid sum will typically continue to appear on your credit reports. The account will continue to have any late payments or past-due balances, which will likely lower your credit scores.

After your account is charged off, it's common for the creditor to sell it or assign it to a different debt collector. If this occurs, the initial account and the collection account for the same debt may appear twice on your credit reports. This is acceptable as long as there is simply an outstanding balance on the collection account.

Charge-Offs: How Do They Affect Your Credit Scores?

When it comes to credit ratings, a charge-off is considered a big negative item, or a "major derog." Your credit scores could be harmed by it in a number of ways:

Your credit scores may be impacted by late payments on a charge-off, particularly if they are recent.

A charge-off bill that is past due may lower your credit scores once again.

Your credit scores may be further impacted if the original creditor sells the debt and a collection account appears on your credit reports.

How much time will a charge-off have an impact on your credit scores?

Charge-offs may stay on your credit reports for up to 7 years under the Fair Credit Reporting Act (FCRA). A charge-off has the ability to negatively impact your credit scores as long as it is listed on your reports.

It's important to note that the 7-year credit reporting window begins to run when the initial terminal delinquent occurred. The initial account reached a 180-day past due status on that day.

This seven-year clock does not reset in the event that a collection agency purchases the debt. The seven-year statute of limitations is unaffected by payments either.

When it comes to charge-offs or any other bad item on your credit reports, nothing is able to legally reset the credit reporting timer. You should challenge it and maybe consult an FCRA attorney if a creditor tries to change the date of a charged-off account in order to keep it on your credit reports for longer than seven years.

The good news is that even while a charge-off will remain on your credit reports for 7 years, you are not destined to a life of poor credit. Recent occurrences are given more weight in credit rating models.

Therefore, a recent charge-off will have a considerably higher influence on your credit ratings than one that occurred years ago.

Does paying down a charge-off affect anything?

If (and preferably when) your financial condition improves, there are a number of reasons you might desire to pay a charge-off. Charge-off accounts should be settled to avoid legal action by debt collectors. You might be able to avoid receiving collection letters and obnoxious phone calls. The best part is that it's possible that paying up a charge-off will raise your credit scores.

• Just keep in mind that paying for a charge-off does not ensure an increase in your credit scores. In terms of credit rating, the charge-recentness—or off's when it occurred—is what matters most. A charge-off could lower your credit scores even if there is no outstanding balance, especially if the charge-off is recent.How Is a Charge-Off Erased From Your Credit Reports?

  You'll typically need to exercise patience when it comes to charge-offs and your credit reports. According to the FCRA, charge-offs must be removed from your credit reports after seven years. However, neither a credit agency nor a creditor are compelled to delete an early charge-off.

  A charged-off account can still be removed from your credit reports before the seven-year window closes in a few different methods.

  You have the right to challenge any inaccurate or dubious information on your credit reports, including charge-offs.

  When it abides by the regulations, a credit agency is only permitted to keep a charge-off on your credit record for 7 years. You can request that a credit agency look into an account if it has inaccurate information (such as incorrect dates or balance details) or if anything about the account seems suspect.

  The credit bureau then has 30 days (in certain circumstances 45 days) to confirm that the account is entirely accurate or remove it from your report. You have two options: either handle these disputes on your own, or enlist the assistance of a reputable credit repair business.

  In exchange for payment, you might request deletion from the creditor or collection company.

  This tactic is difficult and frequently fails. In exchange for payment, you might try to haggle with a creditor to have a charge-off removed from your credit reports early. If a creditor wants to remove the account early, it can ask the credit bureau to do so. In the end, credit reporting is a voluntary procedure.

  The problem is that the credit bureau may not respect payment for deletion agreements since they don't like them. Creditors and collection agencies are advised not to enter into such agreements with consumers by the Credit Reporting Resource Guide, also known as the credit reporting rule book. A credit bureau may terminate a company's account if a creditor or collection agency is discovered to be providing pay-for-delete agreements. After that, the business was unable to obtain credit reports or provide any credit data to the bureau.

  Get the offer in writing before providing your payment details if you are successful in persuading a creditor to accept payment in exchange for deletion. You might need to speak with a lawyer or file a complaint with the Consumer Financial Protection Bureau if the account does not disappear from your credit report after payment as promised.

  Although it is permissible to be paid to have information removed, creditors and collection agencies are advised against doing so by the credit bureaus.

  Charge-offs may negatively impact your credit score. It's ideal to prevent charge-offs from happening at all costs if you can for the sake of both your credit scores and your budget.

  Consolidating your debt and reorganizing your spending plan may provide you with some relief if money is tight. Other choices to think about include bankruptcy, credit counselling, and debt settlement. Be sure to carefully weigh the advantages and disadvantages of each choice before deciding.

  Even if you already have charge-offs on your credit reports, you can still build good credit. You may always fix your previous credit problems and establish better credit going forwards.