Youve fallen behind on a loan payment—far behind. After a certain period of non-repayment, your debt is considered a charge-off, or a debt that your creditor assumes you wont pay. Although youre still legally liable for this debt, your original creditor may turn it over to a collection agency to recover it.
Getting behind on debt payments can lead to serious consequences like charge offs and collections. Both can trash your credit, but is one worse than the other? This guide will explain the key differences between charge offs and collections accounts, including how they impact your credit score and which one lenders see as more negative
What is a Charge Off?
A charge off occurs when a lender writes off a delinquent account as a loss after several months of missed payments. It typically happens around 120-180 days past due.
When an account gets charged off
- The lender closes the account and writes it off for accounting and tax purposes
- You still legally owe the debt – it is not forgiven or canceled
- The account gets listed as a “charge off” on your credit reports
- Your credit score will drop significantly from the negative mark
So charge offs make it look like you failed to repay a loan or line of credit. Even though you still owe the money, the original lender has given up on collecting through normal means.
Charge offs stay on your credit report for 7 years from the date of first delinquency. This major derogatory mark will drag down your credit scores and make it harder to qualify for new credit.
What are Collections?
If an account goes unpaid after a charge off, it may get sent to a collections agency. The original creditor hires these agencies to pursue payment aggressively.
When in collections:
- The account gets listed as “in collections” on your credit reports
- You’ll receive calls and letters requesting payment
- Collectors may threaten to sue or garnish wages if you don’t pay
- You can negotiate payoff options like settlements for less than the full balance
Like charge offs, collections stay on your credit report for 7 years. They indicate you failed to repay a debt and got referred to third-party collectors. Multiple collections accounts will cause significant credit score damage.
Charge Off vs. Collections: Which is Worse?
Since both charge offs and collections show defaults on your credit history, they will lower your scores. But is one considered more negative than the other by lenders?
Overall, charge offs tend to be seen as slightly worse than collections:
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Charge offs directly represent a lender’s write-off of debt as a loss. This signals serious delinquency from the original creditor’s perspective.
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Collections show the account is still active and being pursued. While still negative, it indicates the creditor hasn’t completely given up on repayment.
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Lenders recognize charge offs as the first stage of non-payment. Collections come after, as a last attempt at recovering the bad debt.
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FICO and VantageScore models penalize charge offs more. For instance, FICO deducts up to 100 points for a recent charge off but only up to 85 points for collections.
However, both indicate a default and are factored into all credit scoring models. One collection isn’t necessarily better or worse than a charge off – it depends on the overall credit profile. Multiple unpaid collections are worse than a single charge off.
How Charge Offs and Collections Affect Credit Scores
To estimate the credit score impact of a charge off or collection, here are some general ranges:
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Charge off: 100-150 point drop, depending on credit history length and other factors. FICO penalizes charge offs more than VantageScore.
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Collection: 85-100 point drop, again depending on your profile. Multiple collections have a snowball effect.
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Unpaid charge off or collection: More points lost compared to a paid account in good standing. Shows continued non-payment.
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Recent (under 2 years): More impact than older defaults. Displays current financial issues.
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High original balance: More points lost compared to defaults on small balances. Indicates greater disregard for larger debts.
While damaging, paying off charge offs or collections won’t remove them from your reports. But it can help rebuild scores by up to 50 points. Paid items are better than unpaid.
How Long Before They Fall Off Credit Reports?
Charge offs and collections both remain on your credit reports for up to 7 years from the date of first delinquency with the original creditor.
This is the maximum reporting time allowed under the Fair Credit Reporting Act (FCRA). Even if your state’s statutes of limitation on debt collection are less, charge offs and collections can stick on your credit reports for the full 7 years.
For example:
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You miss your first credit card payment on March 1, 2022. This is the start date.
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The account gets charged off around July 1, 2022 after 120 days of non-payment.
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A collection agency picks it up around October 1, 2022.
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Both the charge off and collection can remain on your credit reports until March 1, 2029.
So expect the negative marks to impact your credit standing for many years. Continue paying other accounts on time and your scores will gradually recover.
How to Deal with Charge Offs or Collections
If faced with a charge off or collection, here are some options to handle it:
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Negotiate payoff discounts. Offer 25-50% less than the balance to collectors and get charge offs noted as “paid settled” if they accept.
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Dispute invalid accounts. Use dispute letters if the defaults are mistakes or past the reporting time limits.
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Improve current credit. Opening new responsible accounts helps counteract old defaults.
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Wait patiently. Charge offs and collections fall off your reports after 7 years.
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Consider credit counseling. Non-profit counselors can help create debt repayment plans.
While frustrating, don’t ignore charge offs and collections. Communicate with creditors, consider affordable repayment offers, and take steps to rebuild credit over time. The negative marks will eventually disappear.
The Bottom Line
Having accounts charged off or sent to collections both indicate serious delinquency that drags down your credit. Charge offs directly represent lenders writing off debt at a total loss, while collections show last-ditch efforts to recover amounts owed. Both look bad, but charge offs are usually perceived as slightly worse negatives by new lenders.
The important things are resolving past-due balances if possible, rehabilitating your credit, and waiting patiently for the derogatory marks to fall off your reports after 7 years. With some time and diligent credit management, you can bounce back from the major hits of charge offs and collections.
Should I Pay Off Charged-Off Accounts?
You should pay off charged-off accounts because you are still legally responsible for them. You will still be responsible for paying off charged-off accounts until you have paid them, settled them with the lender, or discharged them through bankruptcy.
What Happens With Charged-Off Debt?
The statute of limitations is the amount of time that a debt can be collected through the legal court system. Once the statute of limitations has passed, the debt is deemed too old to be collected. In this case, the borrower cannot be brought to court for the unpaid debt.
In fact, the debtor can countersue the collections agency that took them to court over a time-barred debt. A debtor can also sue if an agency attempting to collect on an old debt is asked not to contact the consumer again and does so anyway. Such actions are in violation of the Fair Debt Collection Practices Act (FDCPA).
On the other hand, the removal of a charge-off status from a consumer’s credit report doesnt mean the statute of limitations has passed. If, after seven years, the charge-off is deleted from the report, the statute of limitations may still be in effect. In this case, the consumer can still be taken to court for a judgment on their unpaid debt. Each state has its own statute of limitations on debt, which, depending on the type of debt, could be as low as three years or as high as 15 years.
Note that just because a debt has passed the statute of limitations on its payment doesnt mean that the consumer no longer owes. It just means that the creditor or debt collector will not be able to get a judgment in court for the payment of the old debt.
Creditors refer to uncollectible debt as bad debt. When a firm incurs a bad debt, it writes off the uncollectible amount as an expense on the income statement. For a debt to qualify as a business bad debt, it must be incurred as part of normal business operations. The debt can be associated with another business or an individual. Bad debt charge-offs are more likely to occur when associated with unsecured forms of credit, such as credit card debts or signature loans.
“Never Pay Collections or Charge Offs” is HORRIBLE Advice (2021)
FAQ
What is worse, charge-off or collection?
Debt charge-offs significantly lower your credit score and stay on your credit report for seven years. While your creditor has stopped collection attempts, you’re still legally responsible for the debt.
What comes first, collection or charge-off?
However, not all debts are charged off before going to collections. Some lenders assign accounts to third-party collectors before charge-off, or may never sell the debt at all.
What happens if you don’t pay a charge-off?
Should you settle charged off debt?
Should You Choose Debt Settlement? Debt settlement can provide significant financial relief by reducing the amount owed and offering a faster path out of debt. However, the trade-offs include a potentially steep drop in credit score, tax consequences, and additional fees.