Recovering from a Charge-Off: What it Means and What to Do

If you’ve ever seen a “charge-off” on your credit report, you may have panicked. However, there is no need for that. There are steps you can take to fix your credit. Here is what you need to know. 

What is a Charge-Off?

A charge-off is when a creditor decides that your debt collection is unlikely. It’s an accounting action where the lender writes off the debt as a loss on their books.

• Time frame. This usually doesn’t happen until after 120-180 days or more after the past due date.
• Not Debt forgiveness. This doesn’t mean that the debt is forgiven. This is a common misconception about charge-offs.
• Responsibility. You are still on the hook for that money. The lender may still try to collect or sell the debt to a collection agency.
• Signal. A charge-off is a serious negative mark on your credit report and can stay on your report for up to 7 years. It may convey to lenders that you are unable to manage debt responsibly.

How to Handle a Charge-Off

Due to its serious nature and how negatively it affects your credit, if you receive notice or see a charge-off on your credit report, here are some steps to take:

Verify the Debt

The first thing to do is to make sure the debt is actually yours. The charge-off on your credit report could be an error. If so, report the error right away to all three credit bureaus to get the charge-off removed.

Negotiate

If you determine the charge-off is yours, you have a few options depending on who holds the debt. The lender may still have the debt (even after it has been written off as a loss) in an effort to collect, or the lender may have sold the debt to a collection agency.

Charge-Off Removal

You can try to get the charge-off removed from your credit report, but just understand the reality is that you have very little negotiating power since the debt has likely been written off.

Can you get a charge-off removed from your credit report?

• The short answer is, it depends. Your chances are slim once the lender has written off the debt. Paying off the debt doesn’t remove it from your credit report.

Charge-Off Removal Can Happen

Removing a charge-off from your credit report is a long shot, but there is a slim possibility in a few scenarios.

• Pay-for-delete. You offer to pay “if they (whoever listed the charge-off on your credit report) will remove it from your credit report.”
  • The original creditors (banks, credit card companies) will most likely not remove a charge-off. But it doesn’t hurt to ask.
  • You have a slightly better chance of asking collection agencies to remove the negative mark from your credit report.
• Reporting errors. If there are any inaccuracies you can dispute, there’s potential to get them removed from your credit report. Errors or inaccuracies could include things like:
  • Incorrect balances
  • Wrong dates
  • Duplication of charges or data
    • Trying to get a charge-off removed from your credit report when there are errors adds a little more leverage to your case. It’s a better strategy than paying and hoping.

• Goodwill. Writing a letter to your lender asking for the charge-off to be removed as a gesture of goodwill may work if you:
  • Paid the debt in full
  • Have a strong (positive) payment history with the lender
  • Had a temporary hardship (medical issue, job loss, etc.)
    • The success rate is still low, but it doesn’t hurt to ask.
    • Here’s a resource to help talk to your lender about goodwill options.

Settlement or Payment Plan

If you cannot get the charge-off removed from your credit report, the next best step is to contact the debt holder (the lender or a collection agency) to discuss options for paying off the outstanding balance.

• Settlement. You may be able to negotiate paying a lump sum that is typically 30-70% less than the full balance.
• Payment plan. Breaking the balance into smaller payments means you’ll pay more than a lump-sum settlement, but in more manageable installments.

Key Takeaway on Payments

Paying helps your overall credit health, but doesn’t erase the past behavior. Both are still listed as charge-offs, which is a negative mark on your credit report.

• The scoring difference between “settled” and “paid in full” is small, but lenders do care about the distinction.
• Newer scoring models weigh paid charge-offs better than unpaid charge-offs. Think about it like this:
  • Best – “Paid in full.”
  • Next best – “Settled.”
  • Worst – “Unpaid”

Typical Charge-Off Outcome

Paying off or settling a charged-off account updates your credit file to either “paid in full” or “settled for less than full balance” and remains on your credit report for up to 7 years.

Next Steps After a Charge-Off

If you’re dealing with a charge-off on your credit, it’s gonna be okay. It’s just a temporary setback that can be overcome with a little time and effort. We’ve got you.

Impact of a Charge-Off

In the short-term, your score will drop significantly, which means it may be more difficult and costly to get the following:

• Loans (auto, home, and personal)
• Credit cards
• Housing (higher rent in some cases, mortgage)

These challenges are temporary. In the long term, you can grow your credit score even higher than before with these savvy tips.

Boost Your Score After a Charge-Off

After dealing with the charge-off, you can focus your attention on the things you can do to improve your score fastest.

• Credit Utilization. Improving your credit utilization is the quickest way to boost your score. To do this:
  • Pay down balances aggressively.
  • Keep your credit card balances under 30% utilization, under 10% if possible.
  • (ex. If you have a credit limit of $500, using only $150 is 30% utilization.)
• Payment History. Make sure you are paying bills on time, every time. Payment history is roughly 35% of your score. Payment consistency is what will dilute the negative effect of a charge-off over time.
• Add “Good” Credit. Charge-offs leave your score with a negative mark. Replace it with a positive one by adding a well-managed account like:
  • Secured credit card
  • Credit builder loan
  • Becoming an authorized user on an account with a strong positive history.
  • Learn how to become an authorized user here.
  • Note. Just one or two accounts with good payment history and low utilization can start moving your score in the right direction quickly.
• Check Your Credit Regularly. The way to improve your credit score is by knowing what is on your credit report, monitoring it regularly, and finding and reporting errors quickly.
  • Report errors. After reviewing your report, if you find any inaccurate information or errors, report them immediately to the credit bureaus. Errors can impact your score if they remain unresolved.
    • How to access your credit report. You can get access to your credit score and report on SavvyMoney through online banking or on the annual credit report website. Reviewing your report allows you to find errors early and report them.

Bottom Line

Charge-offs will hurt your credit, but only temporarily if you remain diligent and consistent. Replace the negative mark with proactive, positive credit behavior, and you’ll begin to see your score recover over time.

Do One Thing: If you see a charge-off, contact the debt holder immediately to see if you can work out a plan to have it removed.