When a creditor charges off one of your accounts, your credit score will suffer for it.
While a charge off will damage your credit score severely, that doesn't mean the effects will last forever, nor does it condemn you to a life as a person unworthy of credit. You can begin rebuilding your credit score by using credit responsibly.
Charge Offs
When you get a loan, your lender makes money from you by charging you interest. As long as you make those payments, your lender considers you an asset because the lender earns money from you. If you stop making payments, your lender starts losing money. If you fail to make payments for too long, the lender may give up on the idea that you will ever make it money and declare that you are no longer an asset but a liability. This is exactly what a lender does when it labels your account as a charge-off.
Credit Score
Lenders use credit scores to determine if a consumer is a worthwhile investment. If you've used your credit responsibly and repaid your debts on time, creditors know you're a sage investment and will want to lend you money. If, however, you failed to pay back debts and had an account labeled as a charge-off, your credit score will suffer and lenders won't want to give you a loan. Though credit score calculations differ, a charge-off is a significant negative and is the top reason creditors deny credit applications, according to Bankrate.
Pay Offs
Just because a creditor lists your account as a charge-off does not mean that the debt goes away. You still have to repay it even though the damage is already done to your credit score. If you want to increase your score, the best way to deal with a charge off is to pay the debt off in full. Once this happens, the creditor will list the debt as paid in your credit report and it will help your score.
Rebuilding Credit
Apart from paying off the outstanding debt on the charge-off, you can show lenders you are a safe investment by using your other forms of credit wisely. There's nothing you can do to make the charge-off go away, but you can show lenders that you are a safe borrower by repaying your other bills on time, using a variety of different types of credit responsibly and not using too much of your available credit.
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