How Do Charge Offs Affect Credit Scores?

Credit card companies spend about six months trying to elicit payments from debtors on delinquent accounts. After six months, the company's odds of collecting the debt decrease and the account is no longer worth pursuing. The credit card company then charges off the debt. Credit card company charge-offs carry negative consequences for your credit score.

Negative Effects

A charge-off negatively impacts your credit in a variety of ways. The notation on your credit report signifying that your credit card provider was forced to charge-off your debt and cancel your account hurts your credit score and is visible to anyone who pulls your report. The credit damage rarely ends there. After the charge-off, the credit card company either sells the debt to a debt collector or takes legal action against you. Both collection accounts and money judgments resulting from lawsuits further damage your credit score.

Credit Impact

It is impossible to estimate exactly how much your credit score will drop after your credit card provider charges off your debt. This is because the credit scoring formula used by most lenders---the FICO system---is not public knowledge. The degree to which any credit entry on your report affects your score rests at least partially on other information within your history. As a general rule, the more negative information your credit history reflects, the less the charge-off will impact your already damaged credit score. If you have a high credit score, however, the charge-off will damage your credit rating to a much greater degree.

Removal

Federal law requires credit reporting agencies remove charge-offs from your credit record seven years from the charge-off date. The reporting agencies must simultaneously remove reports from collection agencies that purchased the account after it was charged off. When these derogatory accounts vanish from your credit history, they no longer impact your credit, and your score will improve. Waiting seven years, however, is not the only way to have a charge-off removed from your credit report. If the original credit card account did not belong to you or the credit entry contains any errors, you can dispute the information with the reporting agencies. If your former credit card company cannot validate the entry, it disappears from your history.

Reducing the Damage

Your credit card company can modify any entry it previously placed on your credit report. In some cases, you can negotiate with your credit card company and request that it change the way the charge-off appears. For example, the credit card company can remove the "charged off" notation and replace it with "paid and closed"---which looks better than a charge-off. You must be prepared to pay off or settle your credit card balance and you must conduct negotiations before the credit card issuer sells your debt to a collection agency. After the company sells the debt, it cannot accept your payment and thus has no incentive to alter the charge-off.