Here’s What to Know About a Debt Charge-Off

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

A debt charge-off significantly harms your credit score. Learn about what a debt charge-off is and how to avoid it with your credit card and loan accounts. 

If you don’t make the required payments on a credit card or loan, there are several potential penalties. These start relatively small, like a late fee and possibly a reminder email. But they get progressively worse and can eventually lead to a debt charge-off, which is about as bad as it gets. Whether you’re at risk of having a debt charged off or it has already happened, here’s what this means and how to deal with it.

What is a debt charge-off?

A debt charge-off is when a creditor closes an account, writes it off as a loss for tax purposes, and stops trying to collect the debt. It will then sell the debt, typically to a collection agency. Even though the original creditor isn’t contacting you about the debt anymore, you’re still legally responsible for it.

Creditors do this with accounts that are delinquent for a long period of time. The time frame varies depending on the creditor, but credit card companies usually charge off accounts that have been delinquent for six months or longer.

Your account is considered delinquent if you haven’t made the minimum payment by the due date. Keep in mind that this includes situations where you pay less than the minimum amount. For example, if your minimum credit card payment is $100, and you pay $50, your account is delinquent if you don’t pay an additional $50 by the due date.

How a debt charge-off affects you

Charged-off accounts go on your credit report, so they have a significant impact on your credit score. They stay on your credit report for seven years, although the amount they affect your credit score decreases over the years.

The exact amount that your credit score drops from a charge-off depends on your credit history. However, it will almost certainly be a large amount. The most heavily weighted factor in calculating your credit score is your payment history. With your FICO® Score, which is the type of score most widely used by lenders, payment history accounts for 35% of your score.

For some consumers, even a single late payment can lead to a credit score drop of over 100 points. A debt charge-off is much worse and could have a far greater impact.

You’ll also need to deal with the collection agency that bought your debt. If you don’t agree to a payment plan with the collection agency, it could sue you. And finally, a debt charge-off means your account gets closed, and the creditor likely won’t approve you for new accounts in the future. That’s problematic if, say, it happens with one of the credit cards you like.

What to do about a debt charge-off

A debt charge-off is something to avoid whenever possible. If you have a delinquent account, but it hasn’t been charged off yet, the best thing you can do is contact the creditor. Explain that you’re having trouble making your payments, and see what your options are. The creditor may have a hardship plan available, such as a smaller monthly payment amount. Another option is to work with a nonprofit credit counseling agency.

If you’ve had an account charged off, your best bet for dealing with collections is to either pay the debt or settle it for a lower amount. Collection agencies buy debts for pennies on the dollar, which means they’re often willing to accept less than what you owe. And while they can sue you, that’s almost always the last resort. They’d prefer that you agree to pay or settle.

So, if you’re able to afford a certain amount per month, talk to the debt collector about setting up a payment plan. Or, if you have money saved, offer to make a one-time payment to settle the debt. You won’t be able to get the debt charge-off removed from your credit report. But you can at least get it reported as paid, which is better than unpaid.

One last important thing to note is that if you’re not sure a debt charge-off is legitimate, you can dispute it with the credit bureaus. This is a good first step to take if:

You don’t recognize the charged-off account.The debt charge-off is from several years ago, and you think it may be past the statute of limitations.

When you file a dispute, the party that reported the account needs to provide proof that it’s legitimate. If it fails to do so, then the negative mark is taken off your credit report. Any time you’re unsure of any negative items on your credit report, it’s a good idea to dispute them to see if they’re valid.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

 Read More