A settlement and a charge-off are both common occurrences in the credit card industry. Settling a debt, however, will require you to pay at least some of the balance and will have a different effect on your credit score.
Facts
A charge-off occurs when a credit card company removes an old, unpaid debt from its accounting books and claims it as a tax loss. The debt is then typically sold to a collections firm. A settlement occurs when either the original creditor or a collections agency accepts less for the debt than the consumer actually owes and considers the debt paid.
Time Frame
Charge-offs usually occur 180 days after the last payment was made on the account. A debt settlement, however, can be negotiated at any time either with the original creditor before the charge-off or with a collection agency at any point afterward.
Considerations
Creditors are more likely to consider offering you a debt settlement if you have recently made late payments and the account is in danger of being charged off. A debt settlement arrangement is almost always preferable to creditors than a charge-off.
Misconceptions
Settling a debt after it has been charged off will not result in a charge-off or ensuing collection account being removed from your credit report. Settling the debt at this point will not improve your credit score at all.
Effects
A charge-off is considered a negative entry on your credit report, but the majority of the damage to your score comes from the late payments that precede it. A settlement also reflects negatively on your report, but looks better to lenders than an unpaid charge-off. Settling a debt with the original creditor before a charge-off can also prevent further late-payment notations.
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