What is a charge-off and how can it affect your credit score?

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If you borrow money and don’t repay it, your creditor might ultimately give up trying to collect and “charge off” the amount you owe them.

What does a charge-off normally look like? It might be a credit card bill from college that you forgot about and never paid off. A charge-off could even be a mortgage you walked away from during hard times. Or an unpaid car loan.

However, having a loan charged off doesn’t mean you’re off the hook. In reality, charged off accounts can continue to plague you personally and financially until you resolve your debts or pay them off.

Before you let a charge-off ruin your credit and hold you back from your financial goals, you should find out how and why they can affect you, as well as your best course of action moving forward.

How a charge-off can affect your credit

According to credit reporting agency Experian, a charge-off on your credit report is listed as an amount owed, although you can no longer use that account for future charges. This negative message from creditors intends to show credit reporting agencies that the creditor charged off your debt as a loss.

As credit reporting agency Equifax notes, charge-offs typically take place between 120 and 180 days after you become delinquent on a debt, although the exact timeline depends on the type of debt it is. Like all negative marks on a credit report, charge-offs can cause considerable damage to your credit score. How much damage depends on how long it has been since you became delinquent as well as how you’ve handled credit otherwise in terms of debt levels and your overall payment history.

How to remove a charge-off from your credit report

Charge-offs can remain on your credit reports for seven years from the original date you became delinquent on a debt, or the date you first missed a payment. So, you can wait seven years and see the charged off debt disappear on its own, although you probably don’t want to.

Also note that a charged-off debt will likely be sold to a credit collection agency for a fraction of what you owe at some point. Until the debt falls off your credit reports at the seven-year mark, you’ll have a new account with a collection agency as well as a new balance due.

If you pay off the debt in question while it’s still held by the original credit grantor, the debt will be listed on your credit report as a “paid charge-off.” If you pay the debt once it is held by a collection agency, on the other hand, the debt will be updated as a “paid collection.”

While it may be tempting to let your charged-off debts go away on their own after seven years, it can be smart to be proactive if you can afford to. If you pay off your charged-off debts before they fall off your reports on their own, Equifax notes that it’s possible the negative impact on your credit score may be lessened depending on the credit scoring model used. That could mean getting on the road to better credit on a faster timeline, which may help you qualify for your own apartment or mortgage and reach other financial goals faster.

Facing overwhelming debt? You have options

If you have so much debt that you feel overwhelmed and hopeless, you may want to reach out to a third party for help. You may even be a candidate for bankruptcy if your debts are considerable and your income is too low to allow you to make any progress, although you’ll likely want to research other, less drastic options first.

You can consider working with a debt-relief company to help you craft a plan to get out of debt and stay out. Other options include debt management plans and debt settlement plans, although both have their share of pitfalls. The Federal Trade Commission (FTC) warns repeatedly about the risks of debt settlement in particular, mostly because these plans often lead to further damage to your credit score.

You should probably reach out to a reputable credit counseling agency first if you’re feeling overwhelmed by debt. Credit counseling agencies can provide you with another set of eyes and a professional overview of your credit, including which options might work best for your needs. Once again, however, you should be sure your credit counseling agency is reputable and that you’re aware of any upfront fees or ongoing costs.

The FTC says to be aware that nonprofit status doesn’t guarantee that services are free or remotely helpful for your situation. “In fact, some credit counseling organizations charge high fees, which they may hide, or urge their clients to make ‘voluntary’ contributions that can cause more debt,” the government agency notes.

They also suggest checking companies out with your state attorney general and local consumer protection agency before you move forward.

No matter what you do, you should strive to stop racking up more debt as you find the best path to resolve charge-offs and get back on track. While plastic is convenient, consider switching to cash or debit while you decide what to do next.