We talk a lot about credit here at Debt Steps, and there’s a reason for that: it’s one of the most important aspects of your financial stability. Without good credit, you’re going to to get stuck with high-interest rates and many of the major financial milestones in your life will be out of reach.
One of the most detrimental negative items that can be placed on your report is something called a charge-off. What is a charge-off, you ask? To put it simply, it’s something that happens when a payment is over 180 days or 6 months late and the creditor has written off the remaining debt as uncollectible.
What is a Charge-Off and How Does it Affect My Score?
Charge-offs happen when a customer doesn’t pay on their account for over 6 months past the due date. Typically in these cases, the creditor writes the account of as not being collectible.
This type of action is known as a write-off, and it’s a term used for a variety of different items in accounting.
The report will show relevant information like the amount and the date that it was written off. Having one or more of these on your report will make it very difficult to unsecured or even secured credit. Negative items like this stay on your report for seven years.
It’s important to remember that a charge-off and a write-off are the same things. In either case, that account is now inactive. In many cases, the remaining debt is transferred or sold to a collection agency for far less than the original amount.
This will be shown as a transfer on your report, but this term isn’t always associated with negative elements. In some cases, the debt could be transferred to a new company, or to another credit card. This doesn’t cause any negative elements.
Reviews of the top credit repair companies can help educate you more on the direct implications of having a charge-off on your record.
Do I Still Have to Pay Write-Off Debts?
Just because the amount has been written off by the lender, that doesn’t mean you’re free from the debt. Many people are confused by news like this. After all, the company has already written off the debt as a loss. Why do you still have to pay?
When a company performs a write-off, they do so because they haven’t received any payments in 180 days or more. This means that they don’t expect it to be paid in the near future, so it’s no longer going to show up on their books. This affects the lender’s records, but it does not remove your responsibility to pay the debt.
The debt you have is still going to be owed until you’ve finished paying it back. Certain state laws affect how credit card companies can go about collecting the debt. Most states do not allow lenders to sue in court to collect on an account after three-to-six years. In Rhode Island, however, the statute of limitations is 10 years, which is the major exception.
Collectors will also attempt to collect the amount by phone or mail, even if they can’t settle in court. Beyond the major affect these write-offs have on your credit score, having one or more can also make it difficult to make a major purchase, sign a lease, or even apply for a job.
In many cases, these situations happen outside of our control. Life changes and calamities can easily bring about situations where you can’t afford to make your payments. In these situations, it’s important to speak with your lender directly.
Oftentimes, payments plans are available to those who can’t afford to make the minimum payments each month. In these scenarios, you’ll work out a plan that is doable for you, and one that will address the larger issue of the unpaid debt.
Leaving the debt unpaid will simply drag your score down and remain for seven years. When you’re negotiating with this type of debt, there are a couple ways it can go:
- Paid in Full
If you make consistent payments until the debt is paid, then your report will still show that the amount was charged-off, but it will also say that the amount was eventually paid in full.
- Settled For Less
If you negotiate a lower amount, it won’t be as beneficial to your credit. It will instead show that you “settled for less than full balance.” This should be done as a last resort. The ideal scenario is that you paid everything back.
When a charge-off happens, you’ll find that interest rates skyrocket and any opportunities for new credit become sparse.
You can stay informed on the most up to date charge-off and delinquency rates here.
How to Avoid Charge-Offs
Once an amount is written off, it’s no longer considered revolving debt and becomes a balance due in full. At this point, you can’t get the account in good standing, which is why it’s important to try and avoid this situation at all costs.
If you manage to avoid a charge-off and pay the amount you owe, the debt will become current again on your credit report. Once they write it off, there’s nothing you can do to fix the damage. Creditors will make attempts to collect the money you owe, regardless of whether it’s written off.
They will call you , send letters, or even take you to court in some cases until they get the money you owe them. The can do this internally. hire an agency, or sell the debt to a collection company. That’s why it’s important to monitor situations like these. You may need to send payments to the creditor, or to a collection agency depending on where you stand.
If you find yourself struggling to pay each month, and you want to avoid a charge-off, here are some ways to help yourself stay in the green:
- Understand Score Calculations
Roughly thirty-five percent of your score is based on timely payments. If you fall behind for a few months, your credit score will drop during that time. However, if you can resume payments within 90-days, you’re usually able to bring the account back to good standing.
Case and point: if you miss a month or two, but you come back before the 90-day mark, your score will recover as well. Keep this in mind when you’re budgeting and give yourself this deadline if you need to miss a payment as a result of your situation. It also helps you consider how you can earn the money you need to make the payment within this time period.
- Educate Yourself
Knowledge is power in the realm of credit. If you’re behind and you know you’ll be late, start researching your options. Contact the creditor directly and find out how far behind you are on payments. Also ask them for the “now due amount” so you know how much you need to get back into good standing.
If you can’t make the “now due” payment, ask them what’s the lowest amount you can pay to keep the account from falling further into delinquency the next month. Don’t assume you know what the minimum payment is, because being off by even a dollar can send your account further into the red.
It’s also important to ask them when the account is due to be written off. This will give you a personal deadline and let you know what options you have to prevent it.
- Make Smart Payments
You may look at your amounts and wonder why you would make a minimum payment when it will simply be eaten by the interest or fees. Remember that in this situation, the payment you’re making is going to keep the account in good standing. This will prevent a write-off, which is the ultimate goal.
When you have the means, you should always strive to make a payment larger than the minimum one due. If you can keep the account as a revolving debt, it will be far better for your overall credit, than letting it slip into a written-off amount.
Can Credit Repair Companies Remove My Charge-Offs?
After 180 days, creditors don’t expect to receive a payment from you. When they write-off an account, they are essentially giving up on your ability to timely make payments on the debt you owe them. They still expect the debt to be paid, but they don’t know when you’ll actually pay it at this point.
Once the account is written off, they can start pursuing other means of collecting like calling you constantly, sending letters, or even suing you in court. These are messy situations, and while many state laws set a limit to how many years they can attempt to collect the amount, the item will stay on your report for seven years, and you’ll always have to pay it back.
In the meantime, your credit score will plummet and you’ll be blocked off from important financial milestones. Even if you can get a loan or a credit card, the interest rate will be extremely high to reflect the lack of faith creditors have in your ability to make timely payments.
While we’ve discussed ways to avoid this situation, if the time has come and you’re facing one or more charge-offs on your report, can credit repair help? It is possible that it can help, depending on your specific situation. Let’s take a look at the options you have.
With the help of a credit repair agency, you can start by ordering your report from the three credit bureaus: Equifax, Experian, and TransUnion. Once you’ve received your reports, the next step is to make sure every aspect of your write-off is correctly logged.
Your credit repair company of choice will look at the following items:
- The terms of the initial contract you signed between yourself and the creditor. Some of these details could be incorrect, and cause additional damage on your score.
- Any transfers that were made between the creditor and third-party collection agencies. These should all be correct and up-t0-date
- Your history of payments on the charge-off should also be reviewed for accuracy. If one of them is missing, or reported as late when it wasn’t, you can have it fixed.
- The current balance should be updated and correct.
- Any fees or penalties should be 100% accurate. If there are additional ones on the report, you can have them removed.
It’s also worth noting that the creditor or lender has 30 days to validate your debt. If they can’t, it must be removed from your report by law. Even if they do find the debt to be correct, you still have options that a credit repair agency can assist with:
Agree on New Terms
In some cases, the lender or creditor may be willing to renegotiate the debt with you. You can choose to pay a lower amount to settle the debt or set up a payment plan to get things back on track. If you agree to a settlement, you can also ask them to remove the write-off from your report.
If you strike a bargain with them, make sure you get the agreement in writing before submitting your payment. Keep copies of all relevant documents and send copies to the credit bureaus as well. You should always keep them informed, regardless of what the creditor say.
Waiting For The Expiration
If you speak to your creditors, and they won’t do anything, your best option may be to let the citation expire. This does take seven years, but there’s actually a downside to paying down the charge-off.
There’s a term known as “Re-aging” which is what happens when information is updated on your report. If you pay off an overdue collection, this will re-age the account and cause more damage to your score than if you had left it alone.
Ultimately, you should avoid charge-offs whenever possible, but if they do occur, let a credit repair agency help you weigh your options and help alleviate the damage where ever possible.