Make a charged-off account work for you

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Dear Debt Adviser,
A credit card company wrote off the unpaid balance on my account due to lack of payment and sold the account to another lender. The new lender wants me to pay the full balance I owe. If I pay the balance, they say they will report it as “settled in full.” Will this also be shown on my credit report as settled in full by the credit card company?
— Danny

Dear Danny,
It’s time to pay more attention! That your card went to a charge-off status tells me that you were about six months late on your payments. Why, I don’t know, but since you said they wrote off the balance due to lack of payment rather than lack of a job or other hardship makes me think you could have tried some alternatives to save the account but didn’t. Also, my experience is that lenders sell charge-offs to collectors, not to other lenders. I want you to review the offer more carefully before you respond for a couple of reasons.

First, I want you to be sure the debt has actually been sold and that it is yours. Ask the company contacting you for verification that the debt is yours and that they have the authority to collect it from your original lender. Second, before you make any payment to anyone who has taken over your credit card account, have the company put all the terms of the payment agreement in writing. Never make a payment to a new creditor unless and until you have all the terms in writing. I want you to be sure that whatever payment(s) you agree to and submit will satisfy the debt in full and not leave the creditor/collector an opening to ask for more fees or interest following your payment.

Now for your question regarding how the account is reported on your credit report. The credit card company has reported the original account as charged off. This means your debt is so far behind that their accountants have made them take it off their balance sheets. The account will remain reported as a charge-off on your report for seven years from the date of first delinquency.

Whoever contacted you about paying the credit card account will likely report your account activity to the credit bureaus, probably as a collections account. If you pay what you owe on the collections account, it should be listed as “paid in full” not “settled in full.” The collector also will report to the original creditor that the account was paid, and the original creditor will add to your credit report that the account is a “paid charge-off.”

It is important that you check your credit report after you have paid what you owe to ensure that the lender/collector reported the account as paid or settled in full and that the original credit card account is listed as a paid charge-off. Wait 60 days from the date you made the payment and check all three credit bureau reports to see if the accounts are listed correctly. If not, dispute the item with the credit bureau that is incorrectly reporting the account and include proof of payment. Remember to include any other correspondence you have with the collectors.

The reason I want you to be certain the accounts are reported correctly is that, while your credit score won’t change as a result of the payment, lenders reviewing your credit report are much more understanding of a charged-off account that has been paid late than they are of accounts that have never been paid or were settled for less than was owed.

We all make mistakes, and even though this mistake will be part of your credit report for quite some time, paying what you owe will definitely improve a negative situation. Moving forward, if you can keep on top of your payments and communicate with your lenders as soon as you fall behind, you may be able to avoid a charge-off with a hardship program or credit counseling.

Good luck!

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