What Is a Charge-Off and How Does It Affect Your Credit?

The term “charge-off” means the business that gave you the loan, typically a card company or retailer, has written off the amount you owe as uncollectible, closed your account, and declared it a loss.

But you still owe the debt. And there will be considerable damage to your credit score. When consumers don’t pay on an account for 180 consecutive days, lenders can choose to charge off the account.

When that happens, the lender reports it to the three major credit reporting agencies —Experian, TransUnion, and Equifax — and it becomes part of your credit report for seven years, even if you pay off the balance before then.

Understanding Charge-Offs

A charge-off happens when a creditor decides you’ll probably won’t pay back what you owe, so they write the debt off as a loss in their books.

That doesn’t mean the debt goes away. You still owe the money. It just means the lender has moved the account from “active” to “bad debt” on their balance sheet. This happens after your account has been seriously past due, typically between 120 and 180 days of missed payments.

A charge-off is an internal accounting move by the original lender. Collections, on the other hand, usually come next. Once the account is charged off, the lender might sell your debt to a collection agency or hire one to recover the money on their behalf. That’s when you start getting calls and letters from a debt collector instead of the original creditor.

Here’s how the timeline usually plays out:

• You miss a payment.
• Then another.
• After 30 days, your account becomes delinquent.
• At 60 or 90 days, your creditor may contact you more aggressively.
• If you still haven’t paid the debt after 120 to 180 days, the account gets charged off.

At that point, it’s not just a missed payment anymore; it’s a serious negative mark on your credit report that can stick around for up to seven years.

» Learn more: What happens if you can’t pay your credit card minimum payment?

What Do I Do When My Account Is Charged-Off?

When an account is charged off, you still owe the debt, and it can be collected by the original creditor or by a collection agency.

The original creditor might make an attempt to recover it, but usually hires a collection agency to go after the debt. Even more frequently, the creditor sells the debt (usually for pennies on the dollar) to the collection agency and steps away from the matter altogether. Many borrowers will debate paying charged-off debts in full vs settling.

Once you receive notice that your account has been charged-off, there are several options available:

• Find a way to resolve the debt with the original creditor or collection agency.
• Enroll in a Debt Management Plan.
• Attempt a debt settlement for less than the amount due.
• Do nothing and wait. seven years for the account to be removed from your credit report.

» Learn More: How to Dispute a Credit Card Charge

How to Address a Charged-Off Account

The best option is to resolve the debt with the original investor. Failing that, you should contact the creditor directly or hire an attorney to negotiate a resolution that both sides can live with.

Only agree to pay what you can reasonably afford each month. When you are satisfied with the agreement, ask to see it in writing and have the creditor/collection agency sign it. Never send money before seeing a signed agreement, especially when dealing with a collection agency.

A charge-off can feel like a dead end, but it doesn’t have to be. You still have options to deal with it and start repairing the damage to your credit.

1. Negotiate a Payment Plan or Lump-Sum Settlement
   You can try negotiating a payment plan that fits your budget or offer a lump-sum settlement for less than the full balance. If they accept, make sure to get the agreement in writing before sending any money.
2. Consider a Debt Management Plan (DMP)
   With a DMP, a nonprofit credit counseling agency helps you combine your debts into one monthly payment and may be able to reduce your interest rates. This route doesn’t erase the charge-off, but it can stop things from getting worse and help you get back on track.
3. Explore “Pay-for-Delete” Arrangements
   In some cases, you might be able to negotiate what’s called a “pay-for-delete” agreement. That means you offer to pay the debt (in full or in part) in exchange for the creditor or collection agency removing the charge-off from your credit report. Sounds ideal, right? But there’s a catch — it’s not guaranteed, and many creditors refuse to do it because it goes against the credit reporting rules. Still, it doesn’t hurt to ask, as some may be willing to work with you informally.

Debt settlement is another option, but one that carries severe risk. Debt settlement is when a lender agrees to settle an outstanding debt for less than what is owed.

However, if some portion of your debt is forgiven or canceled, you may have to report that amount as “income” and pay the appropriate taxes. Credit scores will suffer from debt settlement. It is a way out, but consider alternatives like consolidating your debts and DMP before making a final decision.

Statute of Limitations

The “do nothing” approach means you have surrendered. The information that you failed to pay a debt sits on your credit report for seven years. It is unlikely you will be extended any credit during that time.

The good news is that there is a “statute of limitations” that says debt collectors can’t sue you over a debt after a certain amount of time. The laws governing debt collection vary from state to state, but the statute of limitations generally falls between three and six years. Collection agencies can still try to collect unpaid debts, but if there is no court judgment against you, there is no way to force you to pay. The debt is essentially uncollectable.

So while your credit report will show a charge-off on it for seven years, the debt itself could be gone after three to six years, depending on where you live.

However, certain actions can restart the statute of limitations. Something as simple as making a partial payment, entering a new payment agreement, or even just acknowledging the debt in writing could reset the clock. That could open you up to new legal risk, even if the debt was close to expiring.

Before making any moves on an old charged-off account, it’s smart to check the laws in your state or talk to a legal or financial expert who can guide you based on your situation.

Impact of Charge-Offs on Credit Scores

Charge-offs can have serious and damaging effects on a borrower’s credit rating and credit score.

A charged-off account will be reported to the major credit rating bureaus and remain on your credit history for seven years, making it difficult for you to get new credit. That is why it is advisable to try and settle a credit card debt before you have defaulted on your account.

Settling your credit card debt for less than you owe will require you to call your credit card customer service department and ask to speak to someone in the settlements department. You will need to explain your situation and let the person know that you would like to settle the account with the amount of cash you believe you can afford.

Many of the major credit card issuers, like Bank of America, Chase, Citibank, Capital One, and Discover, allow pre-charge-off settlements combined with payment terms to help with your credit card debt.

Rebuilding Credit After a Charge Off

A charged-off account will have a lasting effect on your credit score unless you have it removed from your credit report. This will take some work, and it’s not always successful.

While removal isn’t guaranteed, rebuilding your credit is possible with time and effort. Start by developing healthy credit habits like making on-time payments, lowering your balances, and following these tips to achieve a good credit score.

You might also consider using secured credit cards to rebuild credit. These cards require a deposit but can help reestablish your credit when used responsibly.

Pay to Have It Deleted

Your first option is to request that the charge-off be removed from your credit report in exchange for agreeing to pay the debt. You can either pay in full or set up a repayment plan, but first, make sure you get an agreement in writing that the creditor will have it deleted from your credit report. However, this will be an uphill battle as creditors are unlikely to agree to this arrangement.

Dispute the Charge-off with Credit Bureaus

The Fair Credit Reporting Act gives you the right to dispute inaccuracies on your credit report by sending a letter to the credit bureaus. To dispute a charge-off, request your credit report and identify any inaccurate details about the account. Write a dispute letter to the credit bureau, including documentation that supports your claim. The bureau must investigate within 30 days and remove or update the entry if it’s inaccurate.

Goodwill Adjustment

Goodwill adjustment letters are used to remove late payments from credit reports, citing a personal hardship. Your chances are higher if you’ve been a model customer and had an unexpected hardship, like medical bills or loss of a job. A goodwill adjustment might also be used to correct an honest mistake. Maybe you moved, forgot to change your address, and never received the bill. If you fix your error by negotiating a payment, the credit bureaus may see that as a cause for removal.

Be Patient

If all else fails, you’ll have to be patient. Charged-off accounts stay on a credit report for seven years, but their impact on your credit score will diminish over time, becoming almost insignificant by the fifth year. Continue to pay all bills on time, and your score will recover.

The Pros and Cons

The major advantage of settling before a charge-off is that your credit rating will not be as negatively impacted as it would be if you wait too long before dealing with your delinquent account. In addition, banks are generally easier to work with than collection agencies.

If your account is charged off and sold to a collection agency, you generally will have to cope with their more aggressive tactics. If your account is sold to an attorney, you risk getting sued.

The potential drawbacks: you might pay more to settle with a bank than with a bill collector, and you will have less time to come up with the settlement money. Also, some banks will not work with debt settlement companies, but only directly with you to settle a debt before it charges off. If you are working with a debt relief firm, make sure you first ask your creditor about its policies.

In most cases, however, it is still advisable to settle your credit card debt before it is charged off.

Frequently Asked Questions About Charge-Offs

Can a charge-off be removed from my credit report?

A charge-off typically stays on your credit report for seven years from the date of the first missed payment that led to it. You can request its removal if it’s reported inaccurately, but otherwise, it’s there for the long haul. In some cases, you might negotiate with a creditor to remove it. This is called a “pay-for-delete,” though not all creditors will agree to it.

Does paying off a charge-off improve my credit score?

Yes, but not overnight. Paying off a charge-off doesn’t erase the negative mark, but it does show lenders you took responsibility for the debt, which can help your credit over time. It’s also better than leaving it unpaid, especially if you’re applying for a car loan or mortgage.

What’s the difference between a charge-off and a collection?

A charge-off means your original lender has written off the debt as a loss. A collection happens when that debt is passed on to a collection agency. You might deal with both — the charge-off from the original creditor and a collection account from the new debt collector — on your credit report at the same time.

Can I be sued for a charged-off debt?

If the debt is still within your state’s statute of limitations, you can be sued for a charged-off debt. Even though it’s charged off, you still legally owe the money. Once the statute of limitations expires, you can’t be sued for it, but that doesn’t stop collectors from contacting you. Be cautious about restarting the clock by making a payment or acknowledging the debt. If you’re contacted, it’s worth learning more about negotiating effectively with debt collectors.

How does a charge-off affect my ability to get new credit?

A charge-off is a major red flag for lenders. It signals serious trouble with past debts, which makes it harder to get approved for credit cards, loans, or even housing in some cases. The more recent the charge-off, the more it weighs down your credit score. If charge-offs are piling up and you feel overwhelmed, it may be time to explore bankruptcy as an option for overwhelming debt.