What does 'charged off' mean?

Steve BucciDear Debt Adviser,
A few years back, I had a credit card as well as a credit line with a store. I had an outstanding debt for some time, though I was eventually able to pay it. Now, on my credit report, those debts appear as "charged off." This should not be possible. I paid them off! Is there anything I can do, or do I have to pay those debts again?

-- E.S.

Dear E.S.,
Thanks for an excellent question. Many people don't understand the jargon used in credit reporting and, as a result, can't tell where they stand. What does "charged off" mean? The term refers to taking a delinquent account off of the creditor's books. Your original loan was an asset to the creditor. The loan was charged off as a loss when you got so far behind in payments that the accountants doubted you'd ever pay. You did pay, and that's great! But that doesn't change what already happened. At one point, your debt was charged off, and your credit report is accurate in reflecting that. It'll show the charged-off debt for seven years from the date it first went into continuous delinquency.

Paying off the charged-off debt may not help your past, but it does help your future. First off, you will not have to pay again. Secondly, there is a lot you can still do to help your present and future credit.

Your credit report is used in many ways. It can help decide whether to loan you money, rent you an apartment, hire you at a new company, promote you at an existing job or issue you an insurance policy. Your report, like millions of others, has a blemish on it. But since most of us make mistakes or hit a rough patch in life from time to time, this isn't the end of the world.

Your particular blemish can't be erased until seven years has passed, but it can be covered over. By that I mean you can add positive information to your credit report which, along with the passage of time, will offset any negative effect. Plus, the fact that you did eventually pay what you owed will tell anyone viewing your credit report that you did make good on your promise to pay. It shows that you keep your commitments even when it is difficult to do so.

You should begin to see some improvement two years after the accounts were charged off. Adding positive information to your credit report will help improve your credit even faster. Paying your existing credit accounts on time and as agreed will mean positive information is added each month to your credit report. Keeping your credit card balances below 50 percent of your credit limit is another way to boost your credit score.

Now that you've put this problem behind you, I want you to make sure it doesn't happen again. To keep life's financial bumps from causing as much damage in the future, I recommend you aggressively save money in an emergency savings account. Try to save enough for six to 12 months of living expenses. That will allow you to make payments on your credit accounts during temporary interruptions in income. It can also help you pay a large, unexpected expense without blowing up your credit.

Good luck!

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