What Does a Charge-Off Mean on Your Credit Report?

charge off

By Janet Berry-Johnson, CPA

Debt – it’s almost as American as baseball, hot dogs and apple pie. According to an analysis from Debt.com, roughly 62.4% of American adults carry credit card balances, and 17.5% have student loans. If you’re one of the millions of Americans in debt and are falling seriously behind on credit card and other loan payments, there’s a good chance you’ll see a “charge-off” the next time you check your credit report.

Here’s what you need to know about charge-offs and how they impact your credit.

What is a charge-off?

A charge-off is when you are so late on your credit card or other loan payment that your lender gives up trying to collect the balance and writes your account off as a loss. Depending on the type of account you have, this may happen 120 or 180 days after you stop making payments.

When the lender writes off your account, the debt doesn’t just go away. Typically, the creditor sells the debt to a collection agency. At that point, you no longer owe money to your original lender. Your credit report will show that the original debt has been charged off and a new account will appear for the debt owed to the collection agency.

How does a charge-off impact your credit history?

Make no mistake, a charge-off is a negative item on your credit report. Like other negative information, it will remain on your credit report for seven years from the original delinquency date – the date of the first missed payment that led to the charged off status.

How it impacts your credit score depends on a couple of factors:

1. Your beginning credit profile

Creditors typically report late payments by how past due they are. According to FICO, creditors report payments as 30-, 90-, 120- and 150-days late. So by the time you get to a charge-off, your credit score has already taken several hits.

The drop in your score from those late payments and the eventual charge-off depends on your overall credit profile. If you have a long history of late payments and charge-offs, the effect of another account going to collections may be negligible. However, if you’ve generally managed credit responsibly and maintained a healthy credit score, the impact could be significant.

According to Equifax, a 30-day delinquency could cause as much as a 90- to 110-point drop in a credit score of 780 for someone who has never missed a payment. Meanwhile, someone with a credit score of 680 and two prior late payments in the past couple of years could see a 60- to 80-point drop after being hit with another delinquency.

Essentially, by the time your account reaches the charge-off point, your credit score will decrease a little more, but most of the damage has already been done due to the late payments.

2. When the charge-off occurred

A credit score considers late payments and other negative information on your credit report using three criteria:

  1. How recently it happened
  2. How severe the late payments or negative information is
  3. How frequently it occurs

Because of this, a recent charge-off is more damaging to your credit score than one that happened a long time ago. If you take steps to start managing your credit responsibly, such as making on-time payments and keeping your balances low, you will begin to see an improvement long before the seven-year window is up.

However, as long as the charged-off debt remains on your credit report, you may have trouble getting approved for a new loan or credit card. Lenders view a credit score as an indicator of the amount of risk they’re taking on by loaning money to you. A history of paying your bills on time and a high credit score generally indicate you will continue to repay debts as agreed.

On the other hand, a history of late payments, charge-offs and a low credit score cause lenders to view you as a high-risk borrower. You may still be approved for a loan or line of credit, but you’ll likely have to pay a higher interest rate.

Will paying a charged off account help your credit score?

Maybe you’ve had some credit issues in the past but now want to get out of debt and rehab your credit score. In that case, you may wonder whether paying off a charged off account will help and remove charge-offs from your credit report. Unfortunately, paying off an account in collections won’t immediately improve your credit score – at least not in any significant way. However, it can help improve your score over time.

Once the debt is paid in full, your credit report will be updated to show the account as “Paid Collection.” The collection will remain on your credit report for seven years, but paying off the balance will lower your outstanding debt, which may have a positive impact on your credit score.

How to pay a charged off account

Remember, if your original creditor sold or transferred the debt to a collection agency, the balance on the original account will be zero, and the collection agency is now the legal owner of the debt. This means you’ll need to make payments to the collection agency rather than your original lender.

Generally speaking, you have two options for paying off the debt:

  1. Lump sum payment
  2. Installments

Lump sum payment

Paying off the balance in full all at once is the fastest way to resolve a collection. It may also be the cheapest way to handle your debt, since you may be able to negotiate a lower payoff amount. Just keep in mind that settling the account for less than the full balance owed may not have as positive an impact on your credit score as paying the balance in full.


Paying off the balance by setting up a payment plan where you pay down the debt in regular installments may be a better option than waiting until you save up enough money to pay the balance in full. That’s because the collections agency may be able to charge interest on the outstanding balance. The Fair Debt Collection Practices Act (FDCPA) allows a collection agency to add interest and fees to the balance as a part of their collection efforts.

Typically, the interest rate charged by the collection agency charges cannot be higher than the rate listed in the terms and conditions of your contract with the original lender. Making monthly payments toward your balance may limit the amount of interest and fees you’ll pay over and above the original amount owed.

Before contacting the collection agency, review your finances and determine whether you can afford to pay off the balance in full or if you’ll need to request an installment plan. Then reach out to the collection agency with your offer. You might also consider your options for establishing a debt management plan, which you can find via some nonprofit organizations or consolidating your debt to make it more manageable.

While it might be tempting to work with a credit repair company that promises to handle the negotiations for you, doing so can be expensive. Plus, the credit repair industry is rife with scams that can further damage your credit.

Once you’ve discussed your payment options with the collection agency and agreed to either a lump sum or monthly payments, get the agreement in writing. Make sure you review the agreement thoroughly before submitting payment, so you have recourse if the collection agency doesn’t hold up its end of the deal.

Bottom line

Charge-offs on your credit report will negatively impact your credit score and make it more difficult for you to borrow in the future, so try to avoid delinquent debt whenever possible. That said, if you do face financial difficulties and have an account sent to collections, don’t panic too much. It is possible to recover from a charged off account. Get in touch with your creditor and pay off your debt as soon as possible. Then work on rebuilding credit so you can start to see signs of improvement over time.

About the author

Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes.

Written on June 25, 2019

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