What is a charge-off?

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October 19, 2024

3 min read

What is a charge-off?

A charge-off happens when a creditor thinks they won’t be able to collect the money owed to them by a borrower, usually after about 180 days of missed payments on a credit card. To manage their business, the creditor must reflect this on their financial books as well as reports it to the credit reporting agencies. Although the creditor counts the loan as a loss, a delinquent borrower still owes the debt and should pay if off.

Here’s what we’re going to cover:

What does charge-off mean on your credit report?
How does a charge-off work?
How charge-offs affect your credit
Avoiding a charge-off
Oportun: Affordable lending options designed with you in mind

Key takeaways

A charge-off occurs when a creditor deems a debt unlikely to be collected after extended non-payment.
It remains on an individual’s credit report for up to seven years. This negatively impacts one’s credit score.
Despite being written off by the creditor, the debt is still owed and can be pursued by the creditor or a collection agency.

What does charge-off mean on your credit report?

When a charge-off appears on an individual’s credit report, it signifies that a creditor believes the borrower is unlikely to repay the debt. This status is a red flag to other potential lenders, landlords, and utility companies who depend on receiving payments from an individual. It suggests financial irresponsibility and an inability to meet debt obligations, making it harder for the borrower with the charged-off debt to obtain new credit in the future. It can also significantly damage one’s credit score.

How does a charge-off work?

Once a debt reaches the charge-off stage, the creditor updates the account status to “charged off” and writes it off as a loss. This action allows the creditor to remove the debt from its active financial accounts and claim it as a loss for tax purposes. However, the creditor may sell the debt to a collection agency. Then, the agency will attempt to collect the outstanding amount. Alternatively, the original creditor might continue its collection efforts or pursue legal action.

How charge-off affects your credit

A charge-off can be a damaging mark on an individual’s credit report, and it might . This negative mark will stay on a credit report for up to seven years after the date of the first missed payment that led to the charge-off. This can affect the individual’s ability to get new credit, rent an apartment, or even secure a job in some cases.

Can you remove charged-off accounts from your credit report?

Removing a charged-off account from a credit report is challenging but not impossible. One way is to negotiate with the creditor or collection agency to remove the charge-off in exchange for full payment of the debt. This is often referred to as a “pay for delete” agreement.

If there are errors in the reported information, you can dispute the charge-off with the credit bureaus. If the dispute is resolved in your favor, the charge-off can be removed from your credit report.

Avoiding a charge-off

Taking proactive steps can help you avoid a charge-off. If you’re struggling to make payments, here are some strategies to consider:

Ask for a payment plan

If you know you won’t be able to make a payment, contact your creditor as soon as possible. Many creditors are willing to work with you to set up a payment plan or modify your existing one to make payments more manageable. This shows that you’re making an effort to pay back your debt, which may prevent a charge-off.

Try budgeting

Creating and sticking to a budget may help you manage your finances more effectively and ensure you have enough funds to meet your debt obligations. By prioritizing your expenses and cutting unnecessary costs, you might be able to allocate more money toward paying off your debts and avoid falling behind on payments.

Oportun: Affordable lending options designed with you in mind

Now that you understand what a charge-off is, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about: