When you stop making payments on a loan or credit card, the creditor may eventually close the account and label it a charge-off, which can stay on your credit report for up to seven years. This can be extremely damaging to your credit report and doesn’t get you off the hook for repaying what you owe. Your debt may still be handed over to a collection agency.
Here’s what you need to know about how long a charge-off stays on your credit report and other financial implications.
Key Points
• A charge-off remains on your credit report for up to seven years from the first missed payment.
• A charge-off can have a significant negative impact on your credit score.
• The charge-off may appear twice on your report if sold to a collection agency.
• Paying off the charge-off can help improve your credit score over time.
• Inaccurate charge-offs can be disputed with credit bureaus for removal.
What Is a Charge-Off?
A charge-off is a type of credit account closure that happens when the lender has no expectation of receiving payment. The creditor writes off the loan or credit line as a loss. Once you’re past 120 to 180 days delinquent on your account, a lender may write off your account.
But this doesn’t mean your legal responsibility as a borrower is over. The account can still be transferred or sold to a collection agency, which can take over the collection process. They can even initiate a lawsuit to recover the outstanding balance, along with fees.
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How Much Does a Charge-Off Affect Your Credit Score?
A charge-off can have a considerable negative impact on your credit score. One reason why: Your payment history, meaning making timely payments, is the single biggest contributor to your credit score at 35%.
What’s more, the charge-off may be listed twice on your credit report, causing double damage. Your original charged off account with the creditor will be listed, and then it may show up as a separate account with a collection agency.
On top of that, all of the late or missed payments leading up to the charge-off could show up separately. So if you missed six loan payments before the account was closed, each could ding your score. And, as noted, since payment history is one of the most important factors affecting your credit score, this can hurt your score significantly.
It’s hard to put an exact figure on the toll this can take on your credit score. Some estimates say it could negatively impact your score by up to 100 points or possibly more, depending on the particulars.
If you end up paying the charge-off, either to the lender or a debt collector, that will show up on your credit report and could help improve your score compared to leaving the account unpaid.
How to Remove a Charge-Off
There are two reasons a charge-off will be removed from your credit report: Either the information is inaccurate, or it comes from a fraudulent account. Here’s how to handle removing a charge-off from your credit report:
• If you see a credit score update that shows an incorrect charge-off, you can file a dispute directly with the credit bureau. They’re required to investigate and respond within 30 days, but you’ll have a better chance of success if you submit documentation to support your case.
There’s usually no risk of lowering your credit score because of a dispute. The process itself should not decrease your score. However, if information comes to light that has a negative impact (such as your credit limit being lower than it was believed to be), then it might knock your score down somewhat.
If the charge-off seems like it’s from a fraudulent account due to identity theft, there are a few steps you should take:
• First, consider freezing your credit and adding a fraud alert to your credit report to prevent more damage. Then report the event to the Federal Trade Commission and your local police; after all, financial fraud is a crime.
• After that is complete, you can submit any relevant paperwork to the credit bureau to initiate the dispute and get the fraudulent charge-off removed.
When Removing a Charge-Off Isn’t Possible
It’s not possible to remove a charge-off if it’s accurate. You can contact your lender to get more information about the account, including how to bring it to good standing if possible. If the account has been sold to a debt collection agency, you may want to contact them and work out a payment plan to avoid legal issues.
But even though the entry stays there for up to seven years, your credit score will begin to improve before then, which you can track with a credit score monitoring service.
How to Rebuild Your Credit Rating
It can take time to build credit when dealing with a charge-off. But you can start taking simple steps to improve your credit score.
• First, consider addressing the debt you owe, even if it has gone to collections. Even though the original account is considered a charge-off, you could face legal repercussions if you don’t work out a repayment plan with the collection agency. You may be able to negotiate with the creditor.
• How long a charge-off stays on your credit report after it’s repaid can still be seven years. You can’t usually alter or remove the fact that this occurred. However, you’ll likely have an easier time building your credit score and avoiding a potential lawsuit if you pay it off.
The next step for how to build credit is to stay or get up-to-date on any other credit accounts. Some tips:
• Reduce your spending by using a money tracker app or other budgeting tool, and prioritize debt payments to ensure additional late payments aren’t added to your credit report.
• Plus, lowering your credit card utilization is another major contributor to a better credit score. The debt utilization category in general accounts for 30% of your score. The lower your amount of debt compared to your available credit, the more positive impact you may see when you go to check your credit score.
These steps can have a positive impact on your credit score after a charge-off or other negative event.
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Does Removing a Charge-Off Improve Your Credit Score?
Your credit score should improve once a charge-off falls off your credit report after seven years pass or is removed because it’s either inaccurate or fraudulent.
But even before the seven-year period ends, you should be able to build your score over time by handling your debt responsibly, such as making on-time payments and keeping your credit utilization ratio to no more than 30% (preferably no more than 10%).
Do Charge-Offs Go Away After 7 Years?
Yes, a charge-off stays on your credit report only for seven years. The good news is that typically the start date is the first missed payment associated with the account, not the date the account is actually charged off. In other words, if your payment is reported past due on January 1st but it isn’t charged off for a few months (often 90 to 180 days), the seven years on your credit report would likely begin with the January 1st date.
However, the debt itself goes away at a certain point, based on the type of debt and statute of limitations in your state. Typically, a debt is deemed uncollectible after about three to six years, though the time frame could extend longer. Also, a collections agency may not be able to pursue legal action once the state’s statute of limitations is up, but they may still contact you to try and get payment.
What If the Charge-Off Is Inaccurate?
If the charge-off listed on your credit report is inaccurate, you should file a dispute with the credit bureau. Here’s how the process works.
• Identify the specific incorrect item on your credit report.
• Explain why you think the charge-off is incorrect.
• Include copies of any supporting documentation.
A dispute can be submitted online or via mail. The Federal Trade Commission recommends disputing the charge-off with each credit bureau that has incorrect information.
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The Takeaway
A charge-off typically stays on your credit report for up to seven years, and it can have a significant negative impact on your credit score. If a charge-off is inaccurate, it’s usually a smart move to work on having it removed from your credit history. If it’s accurate, it’s wise to work on remedying the debt and taking other steps to rebuild your credit.
Tracking your credit score and your money can help improve your long-term financial health.
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FAQ
How many points does a charge-off drop credit score?
A charge-off can cause a significant drop in your credit score, but the exact number depends on your personal credit profile. For instance, the number of late payments leading up to the charge-off will affect how many points your score decreases in total.
Does your credit score go up after charge-off?
Your score will eventually begin to rebound after an account is listed as a charge-off if you use credit responsibly. You may see a faster jump if you pay the debt owed on a charged off account instead of leaving it unpaid (and potentially taken over by a debt collection agency).
Is a charge-off worse than a collection?
It’s not straightforward to compare the two because a charge-off can still be in collection if the account is sold to a debt buyer. A charge-off may be worse because the debt can be listed twice: once from the original lender and once from the debt collection agency.
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