A charge-off occurs when a lender gives up on collecting a debt from you, usually after you are several months late on payments. When the debt is charged off, the creditor usually sells it to a collection agency, which tries to get you to pay the debt. A charge-off can have a significant negative impact on your credit rating.
Time on Report
An account that has been charged off appears on your credit report for seven years after the date the account was charged off. Charge-offs usually occur six months, or 180 days, after your last payment, according to Bankrate. After a charge-off has been on your credit report for seven years, the credit bureaus must stop reporting the negative information. When it is no longer on your credit report, the charge-off will no longer affect your credit score.
Effects
The exact impact of a charge-off on your credit score depends on what your credit score was before the charge-off and other positive and negative information on your credit report. Charge-offs for higher amounts will have a stronger negative impact than those for smaller amounts. A charge-off is one of the most damaging items to have on your credit report, along with bankruptcy, foreclosure, unpaid tax liens and court judgments against you. However, as time passes, a charge-off's effect on your score decreases until it stops affecting your score when it comes off the report after seven years.
Removing Charge-Offs
As with any item on your credit report, if the charge-off information is incorrect or does not belong to you, dispute it with the credit bureau reporting it to have it removed from your credit report. However, if the charge-off is accurate, the only way to have it removed is to negotiate the removal as part of your payment of the debt. Steve Bucci of Bankrate recommends you negotiate to have the collection agency remove the debt completely from your credit report upon payment, rather than just marking it as paid. A paid collection account is as damaging to your credit score as an unpaid one. In addition, ask the collection agency to have the original creditor change the charge-off status on the original account to "paid as agreed." Obtain all terms in writing before paying your debt for maximum leverage.
Rebuilding Credit
Even with a charge-off on your credit report, you can take other steps to rebuild your credit and boost your score. Focus on paying all your open accounts on time every month to add positive account history on your report and avoid future charge-offs. Focus on keeping the balances on your credit cards well below each card's limit, because a low debt-to-credit ratio -- the amount of debt you carry relative to your credit limit -- helps your credit score. Avoid applying for new credit, which hurts your credit score, unless you absolutely need it.
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