Many people are using the recent economic events to try to get their credit score in better shape. This means pulling your credit reports, learning how to read them, then figuring out how to resolve problem accounts.
But what if you have one or more charge offs that have made their way onto your report? How are they going to affect your report and overall credit score, and is there anything you can do about them?
We’re going to take a deep dive into charge-offs, what they are, how bad they really hurt you, and if there really are any techniques that you can use to lessen their impact on your creditworthiness.
WHAT IS A CHARGE OFF?
A charge off occurs when a creditor, after many failed attempts to collect, deems the debt uncollectible and the account is closed. Charge offs are derogatory and are still owed. Creditors typically can choose to charge off an account after the account has gone without any payments from four to six months. The account entry will indicate the outstanding past due balance and late payments in 30 day increments. If, after 120+ days the creditor decides to charge off the account, it will continue to carry an outstanding balance and will be reported as charged off.
THE IMPACT OF A CHARGE OFF ON YOUR CREDIT HISTORY
Charge-offs, as with most derogatory item, are reported to the three main credit bureaus Experian, Equifax and TransUnion. Once reported, the account will be updated on the credit report and listed as a charge off. The impact on your credit history will be considerable.
Your credit score will most likely decrease due to the consecutive late payments, offset balance to limit ratio, and being an uncollectable debt. With the two largest factors that influence your credit score being payment history (35%) and utilization (30%), a charge-off can be destructive.
Not only will your numerical credit score be hurt badly, but you may also jeopardize your relationships with future lenders. When you go to apply for a personal loan, finance a vehicle, or even get a mortgage the lender will pull your credit report and see the charge off. This may cause them to weigh the fact that you have already failed to fulfill your end of the previous lending agreement.
HOW LONG WILL A CHARGE OFF BE ON YOUR CREDIT REPORT?
Your credit report is a record of your payment history and personal management of your accounts. When your accounts are deemed a loss and the creditor reports to the credit bureau, that debt is tacked onto your credit report. Derogatory information including charged-off accounts can stay on your credit report for 7 years from the original date of delinquency.
WILL A CHARGE OFF GO TO COLLECTIONS?
Creditors have the right to sell your debt to another company or transfer your debt to a collection agency. In most cases, if a company places your account in collections, the collection agency can report the new account to all three reporting agencies, again negatively impacting your credit score.
Once transferred to collections the charge-off account will show a zero balance and remain on the credit report as a charged-off/written off account.
WHAT A CHARGE OFF DOES TO YOUR CREDIT SCORE
The charge off will have a major impact and lower your score significantly. This is in part due to the lack of payment and increase in credit/utilization it will report.
With 35% of your total credit score being calculated on payment history, charge-offs have a significant impact due to showing consecutive missed payments. The more positive payment history you have established, the more damage a late payment can do, sometimes it can lower a score between 50-150 points.
Additionally, due to late fees, accruing interest and penalties, this can drive the principal balance over the credit limit or high balance. In turn this will negatively impact your overall utilization which accounts for 30% of your credit score.
OPTIONS FOR RESOLVING A CHARGE OFF
There are few options to properly resolve a charge-off; it will require a strategic plan.
If the charge-off remains with the original creditor, repayment may be the best option. As a customer, you have the right to have the creditor validate the debt is accurately reporting. If they cannot, you may be able to dispute the account and successfully have it removed from your credit file. In some cases, paying the charged-off account will show a positive impact to your credit score by eliminating excessive utilization. Seek the advice of a professional to help determine what your best option will be. In general, settling or paying off a charge-off will not lead to the creditor deleting the account. Again, you must use strategy in addressing the issues.
CONSTANTLY MONITOR YOUR CREDIT REPORT
One of the single most important things you can do to stop an account from going into a charged-off status, is to maintain your on-time payments and closely monitor your credit report. There are countless apps and websites where you can obtain a copy of your credit report from each of the three main bureaus. Watch closely, not just to catch errors, but also make sure you’re getting the proper credit as well. Look for inaccuracies with late payments, new accounts that weren’t given the proper opening date, anything that is inaccurate or incorrect needs to be addressed.