Charge off: What is it and what does it mean?

Find out what a charge off means for your credit report and what to do about it.

Checking your credit score through websites such as Credit Karma is always a great step. Knowledge is power and it’s important to know where your credit report stands. However, checking the report is not always beneficial if you don’t truly understand why your credit score is what it is and what all the terminology means. A good term to understand, for instance, are charge-offs.

Click here for a TransUnion infographic on how to read your credit report!

What is a charge-off?

According to Experian, one of the three largest credit bureau agencies in the United States, “charge-off” means that the credit grantor wrote your account off of their receivables as a loss, and it is closed to future charges. When an account displays a status of “charge-off,” it means the account is closed to future use, although the debt is still owed. The credit grantor may continue to report the past due amount and the balance owed. If you pay the account, the status will reflect as a “paid charge-off.”

Why is this charge-off showing up on my report?

When you fail to make payments, usually after 180 days of a missed minimum monthly payment on a credit card, a charge-off will occur.

Do I still have to pay this amount?

When a lender marks your debt as a loss, this does not mean you’re off the hook. It’s very important to understand that you still need to pay this amount in full, but instead of paying it to the original lender, you’re likely going to be paying it to the collections agency who bought your debt.

It’s always a good idea to contact the collections agency and find out exactly how much you owe and how you can pay.

When it comes to your report, mistakes can happen

If you believe there has been a mistake on your credit report, remember that you can dispute errors through dispute letters that help you ensure your credit score is as accurate as possible. Click here in order to find out how.

What can I do to have a charge-off removed from my credit report?

Because, more than likely, the lender sold the unpaid debt to a collections agency, you are no longer able to pay the original lender, but instead, you’ll have to pay the collections agency. Once paid in full, this will show up on your credit report as “paid collections,” and this will continue to appear on your report for 7 years after the original delinquency date.

Take a look at this Experian article on collections to learn more.

What is the first step?

If you need to pay off your debt to a collections agency in order to mitigate credit score damage, there are several steps you can (and need to) take. A good way to get started is doing research on personal loan options that will bring your interest rates down and hopefully offer better terms of repayment.

When looking for the right lender, valuepenguin.com tells us a few things to consider are:

• Interest rates, which typically range from 5 to 36 percent depending on the lender and your credit report. But remember … lower interest rates often mean higher monthly payments, so be realistic about what you can afford
• Origination fees can be up to 6% of the loan — depending on the lender — for entering into a loan agreement process. You should compare the origination fee they plan to set for your loan among lenders as you may get very different numbers from each one.
• Prepayment penalties, as sometimes lenders charge you a fee for paying off the loan before the agreed upon time period

Remember that taking out a loan that you can’t afford to pay delinquent debt will only leave you in the same situation as you started, and your credit score will be severely damaged again. For this reason, it’s important to find the institution that will fit your needs and will allow you to make comfortable monthly payments without falling behind.