Managing credit and debt can be a tricky task. For most people, the ultimate goal is to build excellent credit. Once that goal is achieved, the task is then to maintain excellent credit. What happens when a situation arises that creates difficulty in making agreed upon payments for outstanding debt? Once a certain degree of delinquency is reached for an outstanding debt the lender will charge off the account.
What is a Charge Off?
A charge off is a term used in the banking and finance industry for a credit account that has not been paid in six months or longer. An account is charged off by the lender when it is severely delinquent and the lender feels that it will likely not collect payment on the account; therefore, the account is no longer considered an asset for the company. Although the lender removes the account from its books, the debt is still owed. Once an account is charged off by a lender, it is normally turned over to a third party collections agency who will attempt to collect the debt on the lender's behalf.
What Can I Do to Correct a Charge Off?
An account that is more than 30 days overdue for payment is normally reported to the three credit bureaus. Once an account has been charged off the reporting of that account is updated by the bureaus from delinquent or default to charge off. Technically, a charge off can not be "corrected" unless the information reported on the credit report for that particular account is incorrect, such as the outstanding balance, or some other specific information about the credit terms. The only action that can be taken against a charged-off account is to pay the debt and rebuild credit. To rebuild your credit after an account is charged off, the debt must be paid -- either in full or for a settlement amount agreed upon by all parties. Once the charged-off amount is paid, the account must be updated with the credit bureaus to reflect "paid charge off." To re-establish your credit, you must show potential lenders that you have taken responsibility for your debts; a charge off listed as paid rather than unpaid is a big step in the right direction.
Avoiding Charged-off Accounts
The best way to avoid having an account charged off is to communicate with your creditors. Never get behind on payments for any account without contacting the creditor to explain your circumstances. Often times the creditor will work with you in some way, possibly even reducing the payments, such as a loan modification, or allowing you to skip a payment so that you can get caught up. A charge off is the result of several months of uncollected payments on an account. If you remain in constant contact with your creditors during trying financial situations, you should be able to avoid letting an account fall that far behind.
Rebuilding Credit After a Charge Off
The best way to rebuild credit after a charge off is make sure that all current and future accounts are continuously paid on time. Again, it is very important to pay the outstanding balance on the charged-off account so that it can then be report to the credit bureaus as a paid charge off. As time passes, your credit score will improve slowly as the charged-off account ages and new credit is established, carrying more weight than older accounts -- usually within two years. Bankrate.com recommends pursuing various types of credit, such installment loans or accounts with both variable and fixed rates to prove that you are capable of maintaining both.
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