Some credit report entries -- such as charged off accounts, or charge-offs -- can have a negative affect on your credit history and credit score. Charge-offs appear on credit reports after a lender or creditor sells a delinquent account to a collection agency. Collection agencies attempt to recover the funds owed, and they receive a commission if they are able to collect. If charge-offs appear on your report, make sure you understand the consequences.
How Long Charge-offs Remain on Your Report
Similar to other negative credit items, once a creditor or lender reports a charge-off on your credit report, this information typically stays with you for a period of seven years. Creditors and lenders do not charge off a debt after a few missed payments, however. Instead, they will attempt to collect the debt for a period of 180 days or six months (on average), according to Bankrate. Collection attempts by creditors and lenders cease after a debtor fails to pay his debt for an extended period.
Consequences
Because charge-offs can haunt credit reports for seven years, acquiring new financing during this period can be difficult. Other creditors and lenders will order your credit report before approving your application. They'll take note of your charge-off, and this one item can ruin your chances of getting a new loan or credit card. If you couldn't or chose not to pay an older debt, the prospective lender concludes there's a chance you'll repeat this pattern.
Considerations
Paying a charge-off will not remove the negative item from your credit report. However, if you decide to pay off this old debt, your creditor or lender may update your credit report to read, "paid charge-off." A paid charge-off may not improve your credit score, but this update can help you qualify for loans. Lenders reviewing your credit will take note of the gesture to satisfy old debts, and this may improve your chances for approval. Some mortgage lenders require that old debts be paid off before they will approve your home loan application.
Avoiding Charge-offs
Communicating and negotiating with creditors and lenders may help avoid a charge-off on your report. If you experience hardship that prevents timely payments, rather than default and let the account go to collections, contact your creditors or lenders. Discuss possible provisions to keep your account current, such as skipping payment options, reducing monthly payments or changing/extending due dates.
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