What Is a Charge-Off or Collection Account?

If you have a charge-off or collection account on your credit report, your credit score will suffer as a result. Charge-offs and collection accounts both indicate a failure to pay off past debts, and can hinder your ability to qualify for new credit.

Facts

In a charge-off, the creditor removes an outstanding debt from its accounting ledger, and sells or transfers the debt to a collection agency. Once a collection agency takes possession of the charge-off, it becomes a collection account. Although many people associate charge-offs with credit card companies, any unpaid creditor can perform a charge-off. Both charge-offs and collection accounts appear on your credit report.

Effects

A collection account only affects your credit rating adversely if it exceeds $100. All charge-offs, however, will damage your credit scores. This is because the credit scoring system is a service by which lenders measure their risks of doing business with consumers. Defaulting on a debt indicates that you are likely to do so again in the future. The lower your credit score, the less likely you are to qualify for new credit and loans.

Time Frame

While you're unlikely to suffer a charge-off after one missed payment, a creditor can charge off your unpaid debt at any time. Credit card companies usually wait six months before charging off consumer debts. Hospitals, by contrast, may perform charge-offs after only 30 days. The Fair Credit Reporting Act (FCRA) notes that after 180 days of delinquency, a charged-off account will remain in your credit file for seven years. Should a collection account result from the charge-off, it will adhere to the original account's reporting period. For example, if you received a charge-off that did not become a collection account until two years later, the credit bureaus must remove both accounts from your credit report 7.5 years from the day you stopped submitting payments.

Misconceptions

Paying a charge-off or collection account results in the creditor updating your credit report to reflect the debt's new status. Many consumers pay off old charge-offs and collection accounts in the mistaken belief that doing so improves their credit rating. While a paid debt always looks better to lenders than an unpaid one, paying off collections and charge-offs does not affect your credit scores.

Solution

If a charge-off or collection account appears on your credit report for a debt that does not belong to you, the FCRA gives you the legal right to contest your credit report's accuracy by filing a dispute with the credit bureaus. You can dispute inaccurate collection accounts and charge-offs over the telephone, via the Internet or by mail. You must file your disputes separately with each credit bureau.