Charge-Off: What it is & How to Remove

A charge-off is placed on an account by a creditor when it has been concluded that some debt is unlikely to get paid. A charge-off usually happens when a consumer or defaulter becomes delinquent on a debt. This will affect a debtor’s credit report and can reduce credit scores. It can also affect their chances of getting loans in the future.

If in this situation, what should you do? Who do you talk to? Should you repay the loan? These and many more are the questions we will answer ahead.

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What Is a Charge Off?

A charge-off is taken on an account with bad debt. It is a bad debt because the debtor did not pay it at its due date. A charge off is noticed on your credit report when the creditor concludes that it will be challenging to get their money back. It means that they have tried and failed.

It does not mean you’re free from returning your debt; it only tells the lender is writing off your loan and has assumed that you will not pay it back quickly. In most cases, the creditor hands over your account to a collection agency that helps them retrieve their money.

How a Charge-Off Works

After six months past the due date of a loan, the creditor can decide to write off an account after proper observation. The creditor may notify a respectable credit bureau, after which the account becomes charged off. After this, the unpaid bills reflect on credit reports, and any payment made past due dates shows. These are the factors that influence your reports. They also reflect on your score and affect the probability of getting loans in the future.

After the charge-off, the creditor usually sells your debt to a collection agency. Your loan is not being canceled. It indicates that you now have to deal with this agency in place of the creditor.

How does Charge-off Affect Your Credit Score?

A charge-off is one major item that reduces your credit score, as it causes lasting damage to your account. It affects the account for seven years, starting from when you missed your first payment. Something about this period is that any payment does not influence it, and it does not change when the account is transferred to the collection agency.

A low score can cost you a higher interest rate, an increase in housing deposits, a new credit card, a new loan, and higher insurance charges. Some factors affecting your score from a charged account include late payment if it is recently made and missed payments. Another common factor is one’s account reflecting a collection agency account.

One exciting piece of news about a score is that the credit scoring model reckons more with recent activities on the account. For instance, a charge on your account will have lesser damage by next year.

What to Know if You Have a Charge-off

With your basic knowledge of what charge-offs entails, how it works and how it affects your credit score. Below are some other things you might want to know about charge-offs

  • When do charge-offs happen?

Whenever you take a loan, there’s an agreement with the lender or the credit card issuer on how you will make payment. You must have missed payment and past due dates for your account to be charged off. The creditor would reach out to you if you’ve made no payment 30 days after the due date.

Your debt won’t be considered a bad one until the original creditor has reached out to you and tried to converse on how to go about it for about six months. If there is no payment on your part, your account becomes charged.

  • Charge-off doesn’t mean that you don’t owe the money anymore

You still have to pay up your loan when your account is charged. The charge helps the creditors close their accounts, but your account is not erased. Suppose a collection agency has purchased your account; you will make payments to the agency, not your original lender. If not, your creditor will still likely report your account to a collection agency. In this case, you must pay the creditor through the collection agency.

  • Can your account be charged even if you’re making payments?

Your account can only be charged on two occasions if you’ve been paying regularly. The first reason is that you’ve filed for bankruptcy. The second reason will be that you did not meet the minimum amount you agreed to pay.

  • If I pay my debts, Will they remain on my credit reports?

As much as your account has been charged off, it will still reflect on the credit report. But, your credit report will improve with time because your score depends on recent activities. Over time, your credit report will get better

  • Do I have any option after my account has been charged off?

You can get a bankruptcy attorney or a nonprofit advisory agency to work with you and your original lender. This way, you can make a reasonable repayment plan that will work for both of you. You can also try to write a goodwill letter to your creditor. In your letter, give a good reason for the late payment and a good history of the previous payment.

Know Your Rights

That your account has been charged off does not leave you at the mercy of debt collectors, as they can go over the top when trying to retrieve their money. You can sue any collector that violates any of your rights. Some attitudes that should not be tolerated include;

  • Debt collectors do not have the right to call you anytime. A collector has no reason to call you anytime between 9 pm and 8 am. You can also ask the collector to stop calling or writing to you.
  • They have no right to intimidate you. They are under no obligation to come to your workplace, and the details of your debts should not be made public.
  • Likewise, they have no right to harass you. They can’t use derogatory or offensive words on you. They should not call you repeatedly or threaten you.
  • Not only that, but they have no right to charge you more. You should not be charged any extra cost outside your agreement with the original lender

What to Do if Debt Collectors Are Calling

Although a collector is not obligated to call you anytime or anyhow, they do their job when they call. You both have to agree on the way to pay back your debt.

The collector can talk to your family and friends if you cannot agree. They can send an email, text message, postal message, or put a call through. Although, they cannot divulge some information to them. 

A collector’s call can be sudden and not expected. They can be authoritative and intimidating when they call, but you now know your right as a user. Here are some things to do when they call; 

Answer the Phone

It can look like an easy way out when you ignore debt collectors, but it won’t take the problem away. It would help if you answered their calls. If you are busy when they reach out to you, pick up and fix a time that will work better for you to have the discussion. They can only call you once in 24 hours if you have been reached. Ignoring them will only make the situation bigger because it can affect your score. It can also make it more challenging to take out a loan in the future. 

Request Proof of the Debt

Before conversing with the collector, ask for their name, the company they work for, the amount you owe, and the creditor you owe. It would be best if you asked for a way to confirm that you’re talking to the proper authority. You can ask them to send information relating to your debts to your house. Even if you have changed, they should get an update from the credit bureau. Be sure you’re talking to the right person before divulging your information.

Keep Detailed Records

Always keep a record of the discussion you have with a collector. This record will help you if you decide to talk to an attorney or go to court. It might also help you with disagreements between you and the collector. You should note down the conversation’s date and time, the collector’s name, where he works, and all the essential information divulged during your conversation. Also, keep the documents they sent to you and details received as emails and text messages.

How to Remove a Charge-off from Your Credit Reports

A charge-off can affect your credit score, even when your account has been wrongly charged. However, removing a charge-off or negative report from your credit report is possible. It is more difficult to remove a charge off when you genuinely have an unpaid debt than if it was a mistake from the creditor or credit bureau.

In the case of unpaid debt, the probability of getting it removed is very low. It is riskier when the credit bureau has already been involved because it will affect the creditor and the bureau’s agreement. It’s a bit difficult, but not impossible.

Below are some ways to remedy a charged-off account; 

Disputing a Charged-off Account

No one is above a mistake; an error might occur at the credit bureau, leading to your account being charged off. It might also be a case of mistaken identity or fraud. In any of these situations, start by investigating with the credit agency that reported the charge off. It would help if you also informed the creditor that you would be disputing the charge. 

You’ll need proof of payment to show it is identity fraud or any other evidence on which you can lay your hands. If any credit collector has reached out to you, gather all the information you recorded, and add them to the proof you will send. Finally, send the credit bureau a dispute letter stating who you are, what you would like to have removed, and why the information is incorrect. 

Working With a Legitimate Credit Repair Company

You can also reach out to your creditor by writing a goodwill letter stating why you did not pay initially and a good history of your reasonable payment in past times. However, this method of removal needs you to involve a third party. You either involve a legitimate bankruptcy attorney or a reputable nonprofit advisory agency. Be sure to involve a good, honest, and non-fraudulent company.

They will work with you and your creditor to devise a suitable repayment plan. They can help you get a debt consolidation to pay off your loan. They will get things done faster than you will do if you try to reach out to your creditor yourself because they have the potential of getting a better outcome. They also have an excellent strategy to increase your credit score faster than you will.

When You Can’t Remove a Charge-off

The effect of a charge-off on one’s credit report is very detrimental. If you truly have an unpaid debt, and it seems impossible to remove from your account, you have to wait for the seven-year period of the charge-off to pass. Your score naturally improves over this period.

If you have to improve your credit report before the seven-year ends, try to pay up in parts or make full payment. Reduce your application for new credit. It is also possible to build a different credit account asides from the one charged off. Although you’re still obligated to pay your debts, the charge falls off your credit report after the end of the seven years.

Charge-Off vs. Collections

Charge-off and collection are related, but they mean different things. A collection cannot happen without a charge-off and only happens after the charge-off.

A charge-off happens when a debt has been written off as bad. This write-off makes the original lender sell off the debt to a collection agency to get back their loss. At this point, you no longer pay the debt to the creditor, but to the collector. The collector also tries to reach out to you as the creditor did.

The two parties will reach out to you before taking action. The creditor reminds you to pay up before writing off your account. The collecting agency will also call you before charging you to court. They both affect your credit report, although the damage may be more at the collecting stage.

The difference between these two is that the collection agency can hold you legally responsible. They can also get a court order, charge you to court, and the court can seize your properties as a form of repayment. Not paying a debt collector can also affect your credibility.

FAQ

Should I pay off the charged-off account?

You should pay your debts if you can afford to. We've established that being charged off does not mean your loan is canceled. Your creditor has concluded that they can't get the money quickly, which has been considered a bad debt. It can get sold out to collectors who can carry out legal action.

How bad is a charge-off?

It has a derogatory effect on your credit report and score. Other creditors might choose not to give you a loan because you won't be found creditworthy. A collector can file a lawsuit against you and even get a court order to charge you to court if you decide not to pay.

Can I buy a house with a charge-off on my credit?

Buying a house with a charged-off account will be very difficult. In most cases, you will remove a charge-off from your account before you can buy a home. When a mortgage lender sees your account, they conclude that you're not creditworthy and can't be trusted.

Will Paying off a charge-off raise my credit score?

Paying off your debt will not increase your score immediately. It will improve if you keep paying your other accounts regularly and before the due date. The moment your account gets charged off, it reflects on your score because about 35% of your score is affected by how early you pay your debt.

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