The credit bureaus keep track of your credit history through your creditors. When you fail to pay a debt, a creditor lets the credit bureaus know by changing the status of your account to a charge off. Once you pay the debt, the creditor will change the status to paid charge off. Both statuses have varying negative effects on your credit score and financial future.
Basics
When you fail to pay a debt, such as a credit card bill, the creditor can report your account to the credit bureaus as a charge off. Bankrate reports that as of 2010, creditors typically report an account as a charge off after it becomes 120 to 180 days past due. When a creditor reports your account as a charge off, they no longer consider your debt as an asset. However, you still owe the debt and most creditors give your account to a collection agency to recoup the debt.
Paying a Charge Off
After a creditor writes your debt off as a charge off, the creditor may stop contacting you to repay the debt. Instead, a collection agency will contact you. Typically, you must pay the collection agency the debt you owe. Before paying the collection agency, request that they send you a receipt in writing that states they will update your credit report. Once you pay the collection agency, the agency will change their file on your report to "paid." The original creditor will change your file to "paid charge off."
Effects
A charge off becomes a serious black mark on your credit report and lowers your credit score. The charge-off report will stay on your credit report after you pay the debt. A paid charge off status may slightly improve your credit score. However, paying a charge off will help you look better to a potential lender. Lenders consider the status of your past debts, and having paid them will work in your favor. You may still qualify for a new credit card or loan if the status shows "paid charge off."
Tips
You should check your credit report after paying any charge off to ensure the creditor updated the status of your account. You should order a copy of your credit report 60-days after paying the debt to give the creditor and the credit bureaus time to update your information, according to Bankrate. You can order a copy of your credit report from each bureau for free once a year through AnnualCreditReport.
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