Having a clean credit report leads to lower interest rates, lower fees and more approvals for credit cards, lines of credit and loans. Unfortunately, many consumers face financial hardships and end up with blemishes on their credit report, such as charge-offs. A charge-off can cause future financial problems. According to Bankrate, charge-offs are the number one reason for credit denials.
What are Charge-offs?
After a consumer fails to make payments on his credit card for several months, the financial institution will write off the debt as a charge-off. Typically, this happens after 180 to 240 days, according to Bankrate. Once the institution decides to charge off the debt, they will close the account and list it as "charged off" on the consumer's credit report.
How Banks Handle Charge-offs
Listing an account as a charge-off does not absolve the debt owed to the creditor. After the creditor writes off the account as a charge-off they may either send it to their internal collections department or sell the account to a third-party debt collector. If the creditor uses their own collection department, they will continue to try to collect the debt themselves. If the creditor sells the account, the third-party debt collector will try to collect the debt from the consumer.
How Charge-offs Effect Your Credit Report
After the financial institution writes off the account, the credit bureaus will update your file to show the account as a charge-off that closed per the granter's request. If the creditor sells the account to a debt collection agency, they may also report the debt, giving you a second negative mark. This information will stay on your credit file for seven years plus 180 days from the date of the first non-payment, according to Bankrate.
How Charge-offs Affect Your Credit Score
Having a charge-off on your credit report will lower your credit score. If the account went to a third-party collection agency who reported it to the credit bureaus, it will lower your score even further. However, if the rest of your credit history is better, the effect of the charge-off will not be as detrimental. The effect will also lessen over time as the charge-off becomes older.
How to Handle a Charge-off
Your first step to handling a charge-off is calling the financial institution directly. You may still be able to pay the account with them directly. If you cannot work with the financial institution, negotiate a deal with the collection agency. Collection agencies often offer reduced settlement amounts to consumers. However, be sure to get any settlement in writing before paying on the debt.
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