Does a Charge-Off Negatively Affect Your Credit?

A charged-off debt is a delinquent debt that a creditor writes off as a financial loss. Charged-off debts have gone unpaid by account holders for as long as 180 days. As a result, charged-off accounts can have a negative impact on a consumer's credit rating for several years.

Process

Creditors usually turn over charged-off debts to collection agencies in an attempt to recoup some of the money the account holders owe. These delinquent accounts affect a consumer credit report in several ways. For example, creditors initially report late payments to credit bureaus each time an account holder's payment is 30 days past due. Creditors then report to credit bureaus when they charge off delinquent accounts that remain unpaid. All of that negative information goes into consumers' credit files and lowers their credit scores.

Credit Rating

A charged-off account negatively affects a consumer's credit rating even if the account holder eventually pays off the account. The negative information associated with the account remains in a consumer's credit file for seven years from the date the creditor first reported the account as delinquent. Consumers can help their credit rating after a few late payments simply by bringing their payments up to date and staying current, according to the Fair Isaac Corporation, creator of the FICO credit score. However, Fair Isaac calls a charged-off account a significant problem that usually causes severe damage to a consumer's credit rating.

Paying Charge-Offs

A creditor or collection agency should report to credit bureaus if a consumer eventually pays a charged-off account in full. A paid-off account may be viewed more favorably by future lenders, although the consumer's credit rating has already been damaged. Paying off the account demonstrates that the account holder assumed responsibility for the debt. The account holder also could explain to the lender if he was unemployed or had some other valid reason for not paying the bill before the creditor charged off the account.

Considerations

You can improve your credit rating during the time that a charged-off account remains on your credit report by paying your other debts on time to bolster your credit score. Pay down your debts as much as possible, especially if you have credit cards that are near their limits. Lenders and creditors are most interested in your credit history over the last two years, according to Bankrate.com. Therefore, a recent positive credit history could eventually outweigh negative information in your credit file that's more than 2 years old.