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What Does a Charge-Off Mean on Your Report?

Written by: Kristy Welsh

Last Updated: March 18, 2017

Many people erroneously think when a debt has been charged-off, that it's been cancelled by the creditor. We hate to be the ones to break it to you but this is not true and you are still responsible for paying off the debt. Companies, including creditors and lenders, have profits and losses every year and they make money from profits and lose money from losses. When a creditor charges-off your account, it's declaring your debt as a loss for the company.

What is a Charge-Off?

The term charge-off is used in the accounting of assets for a particular company, i.e. the credit card company. A bank initially considers your debt to be an asset but if you fall behind on your payments, now this asset becomes a liability. So, what the bank will do then is charge-off part or all of your loan from its books.

When this happens, a report goes out to the credit bureaus which then gets incorporated into your credit history and then into your credit score. A loan marked as a charge-off will hurt your credit score and will remain on your credit report for seven years.

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Is a Charge-Off Bad?

Even if these companies aren't actively trying to collect from you, these debts are still owed by you to the company. If you refinance your house or apply for a loan, most mortgage companies will make you pay off these debts. The reason is that these debts can be turned into a lien against your property. Liens matter to a mortgage company for a couple of reasons:

  1. When you sell your home, the monies owed against a lien (plus interest) must be paid off to clear your title.
  2. Liens are in a higher position than a mortgage, meaning they get paid off before the mortgage company gets its money. If the mortgage company has to foreclose and you have lots of liens on your home plus a mortgage, the mortgage company potentially could lose thousands of dollars.
  3. Just because these debts are charged off doesn't mean that the creditor won't come after you later. Creditors have the right to sue you and win a judgment in court until the statute of limitations runs out.

However, if you're never going to buy a home, or at least not for 7 more years (that's when the profit and losses will drop off your credit report), it won't affect you, except for having bad credit. If you buy a car, you won't be asked to pay these debts off, or any thing other than real estate. Again, charge offs are almost as bad as having a bankruptcy, plus you still owe the money.

How to Remove a Charge-Off

Future creditors and lenders take charge-offs seriously, so it's in your best interest to remove charge-offs from your credit report. Debt negotiation is your best tactic for reducing the effects of a charged-off account.

Bankruptcy, although not to be undertaken lightly, is not a terrible option if your debts are out of control. If you keep your credit clean and open three new charge accounts (even gas cards), you can get an A paper (the best rates and terms) loan in 2 years. See our bankruptcy faqs for more information.

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