Charge-off wrecking my credit report

Dear Dr. Don,
I am 22 years old and recently got serious about cleaning up my credit. I got a copy of my credit report and noticed an old credit card had been charged off. My credit limit was $500 on that card and with interest and other fees I now owe $1,100.

I called the collection agency to work out a payment plan. They would not, however, accept my offer to pay $80 a month on the balance. They insist I pay at least $100 a month. Now they are calling and harassing me about paying this bill, when I was the one that contacted them initially! Is there anything I can do to pay my bill and have it taken off my credit report? I heard that just paying it off wouldn't necessarily help my credit. Help! -- Mickey Mount

Dear Mickey,
It's a common misperception that a credit charge-off means that you no longer owe the debt. A charge-off means that the company doesn't think you'll repay the debt, but it doesn't change your obligation to repay.

And paying off the bill won't remove the negative information on your credit report. Negative information stays on your credit report for seven years, except for a Chapter 7 bankruptcy filing (it stays on your credit report for 10 years).

The Federal Trade Commission's Fair Debt Collection publication explains how you can stop a debt collector from contacting you. It states:

"You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note, however, that sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor."

You may not owe enough for the creditor or collections agency to consider it worthwhile to pursue a judgment, but if you are sued to recover this money the judgment will also become part of your credit history. Regardless, you'll need to pay off this debt before getting a mortgage, and even with repaying the debt it will still take two years or more of an unblemished payment history before you can expect to be approved for a loan.

It's easy for me to say, "If you can afford $80 a month, you can afford $100 a month." I'm sure that's what the collection agency is thinking, too. I expect that when given a choice of $80 or nothing the agency will accept your repayment schedule.

Another possibility is to negotiate a settlement with the creditor, not the collection agency, where you pay a lump sum that is less than the $1,100 outstanding debt. If the creditor agrees to a lesser amount, you need them to commit in writing that the debt will be listed as paid-in-full on your credit report.