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.
A charge-off on your credit report can significantly damage your credit score. So you may be surprised if your score increases after an account gets charged off. Here are some potential reasons your credit score could actually improve following a charge-off:
The Damage Was Already Done
Before an account is officially charged-off, you were likely delinquent on payments for several months Each of those late or missed payments was already dragging down your score
So by the time the charge-off happens, your score has already taken a hit The charge-off itself may not make your score drop much further
Credit Mix Improves
Having a mix of different types of credit (credit cards, installment loans, mortgages, etc) can help your credit score If the charged-off account was your only installment loan, closing it may actually boost your mix of credit.
Now you may show fewer installment loans but still have open credit card accounts. This change in credit mix could increase your score.
Credit Utilization Drops
Your credit utilization ratio (the amount you owe compared to your total credit limits) is a key factor in credit scoring. The higher your utilization, the more it damages your score.
When an account is charged off, the entire outstanding balance is removed from your current debt level. This instantly decreases your overall utilization, leading to credit score improvement.
Account Closure Increases Average Age of Accounts
The average age of your credit accounts is also important for your score. Older accounts demonstrate a longer history of responsible credit management.
If the charged-off account was newer than your other open accounts, closing it may raise your average account age. This could counteract some of the negative effects of the charge-off.
Negative Information Falls Off Reports
Charge-offs and late payments remain on your credit reports for up to 7 years. As these negatives age and eventually fall off your reports, your credit score slowly recovers.
If a charge-off drops off your report and was your most recent negative item, your score is likely to increase.
You Continue Using Credit Responsibly
The biggest factor in your credit score is your recent payment history. If you keep all your other credit accounts in good standing after a charge-off, it shows lenders you can still manage credit well.
As you build a history of on-time payments, it can outweigh the negative effects of a charge-off and boost your score over time.
You Pay Off the Charged-Off Debt
Paying off a charged-off account won’t remove it from your credit reports. However, it may have less of an impact on your score. Paid charge-offs or collections look better than unpaid ones.
So over time, paying off the debt could help lessen the damage and allow your score to gradually improve.
What to Do After a Charge-Off
If possible, keep paying your other credit accounts on time and lowering balances. Don’t close all cards just because one account was charged off.
You can also ask the creditor to recall the charge-off from the credit bureaus after you pay it. Or negotiate a pay-for-delete agreement where they remove it from your reports after payment.
Monitor your credit reports and scores to see the full impact over time. Sign up for credit monitoring that provides your credit scores and reports from all three bureaus. This lets you track your progress as your score recovers from the charge-off.
Overall, charge-offs severely hurt your credit initially. But your score doesn’t necessarily continue dropping in the months after it happens. In some cases, your score may even start to slowly improve as long as you continue practicing good credit behaviors.
How a Charge-Off Works
A charge-off usually occurs when the creditor deems an outstanding debt uncollectible; this typically follows 180 days or six months of nonpayment. However, the borrower is still legally responsible for paying a debt marked as a charge-off.
In addition, debt payments that fall below the required minimum payment for the period will also be charged off if the debtor doesnt make up for the shortfall. The creditor crosses off the consumer’s debt as uncollectible and marks it on the consumer’s credit report as a charge-off.
The fallout for having a charge-off on your credit report includes a fall in credit score and difficulty in getting approved for credit or obtaining credit at a lower interest rate in the future.
Paying off or settling the overdue debt doesnt mean the charge-off status will be removed from the consumer’s credit report. Instead, the status will likely be changed to “charge-off paid” or “charge-off settled.”
Either way, charge-offs remain on the credit report for seven years, and the affected party will either have to wait out the seven years or negotiate with the creditor to have it removed after paying off all the debt. In the latter case, if the inability to repay the debt on time was due to a temporary setback like job loss, the debtor could write to the lender explaining the issue, including proof of a good payment history up until the time of the setback.
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 does Charge Off mean on my Credit Report? Does Charged Off mean I don’t have to pay?
FAQ
How long does credit score increase after charge-off removed?
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.
Will paying off a charge-off raise my credit score?
Pay the debt in full
If you have the means, paying off the charged-off account can help improve your credit standing. While it won’t immediately remove the charge-off from your report, it will update the status to “paid charge-off,” which looks better to potential creditors.
How do I fix my credit score after a charge-off?
- Pay bills on time, without fail. …
- Reduce credit card balances. …
- Try a secured credit card. …
- Apply for credit only as you need it. …
- Consider paying off collections.
Will credit score improve after debt settlement?