The Truth about Charge-Offs – Myth Busting Mondays

For this week’s Myth Busting Monday, we talk about Charge-offs – what they are, what they do to your credit, and what you can do to repair a credit file that has charge-offs or other bad credit issues.

What Are Charge-Offs?

Charge-offs are when a creditor deems a debt to be “uncollectable” in order to be able to write it off in their accounting records. Different companies handle charge-offs in different ways – some have an internal collection department, while others will sell old debts or contract third parties to collect for them.

No matter which option a company chooses, charge-offs can be a real headache for consumers, not only because of the damage to their credit reports, but because of the collection activity that often occurs as a result.

Myth:

Charge-offs only occur after several months of no payment – and when they do, they are easy to correct.

Fact:

Charge-offs can occur as soon as 90 days past-due, though most companies wait six months. Regardless of when the charge-off occurs, getting it resolved can be difficult if the company sells their debts to a third-party collection agency.

Myth:

Charge-offs really aren’t that damaging to credit scores.

Fact:

Charge-offs are a significant negative when seen on your credit report, and are much more damaging than a 30-day or 60-day late notation. While not as bad as a bankruptcy or a foreclosure, most creditors won’t lend to someone who has multiple charge-offs on their credit report. Additionally, nearly all mortgage lenders require all charge-offs to be cleared before issuing a home loan.

Myth:

Since the company has written off the debt, I don’t have to pay my charge-offs.

Fact:

Even if your debts are now charge-offs, you are still liable for the debt and if the statute of limitations has not expired on collecting the debt, you may be sued for what you owe. Never assume that you don’t have to pay your charge-offs – always verify the facts.

Myth:

Since I only have one account, I can’t have multiple charge-offs listed for it.

Fact:

You can have one, two, three, or even more charge-offs listed for the same account. The reason being, debt collection companies often sell debt to other collection agencies as well – leaving a trail of charge-offs in their wake. Cleaning up these multiple negative listings can be a real hassle and your credit scores will drop for each new charge-off account listed on your report.

Myth:

Charge-offs are permanent – once you get one on your credit report, there is no getting it off.

Fact:

Despite the very definite negatives that come with charge-offs, there is still hope. These negative listings can be removed if they are inaccurate, just the same as any other debt. And like other debts, there is a credit reporting limit in effect – so if it’s after the credit reporting limit (generally 7 years) then the charge-offs must be removed from your credit report.

Understanding Charge-offs and Your Credit

Once you understand the seriousness of charge-offs and how they affect your credit, you can take steps to avoid having them listed in the first place. Here are three quick tips to avoid charge-offs on your credit file:

  1. Keep all accounts as current as possible. If you can’t pay up in full each month, try to come to an arrangement with the creditor. The goal here is to never be more than 60 days past due on any debt. That way, you are assured of avoiding a charge-off.
  2. Pay attention to any “Final Notice” bills that you receive. Go to the original creditor and try to work something out before the debt is sold to a collection agency. You’ll find that most creditors are willing to work with you because they get more money if they don’t hire out an agency.
  3. Get professional help. If you are having problems with your credit, a credit repair specialist may be able to help you avoid the pitfalls of charge-offs and improve your credit scores at the same time. Disputing inaccurate information (such as debts listed as past-due when they’ve been paid) can help to keep your account from going so far into arrears that the debt is charged-off.

 

No matter what you decide to do to get rid of or prevent charge-offs, there is no better time to act than right now. Charge-offs don’t have to ruin your financial future if you are smart and take the time to be proactive about repairing your credit.