Charge-Off's Effect on Your Credit Report

A charge-off occurs when a creditor removes an unpaid debt from its accounting books. It most often refers to defaulted credit card debts. The charge-off process allows the creditor to dispose of the debt by selling it to a debt collector and writing off the remaining balance as a business tax loss. Charge-offs often have a negative impact on the debtor's credit report.

Initial Impact

The creditor that charges off your debt can insert a negative note on your credit report to reflect the charge-off. Some creditors, such as credit card companies, routinely insert credit report comments, while other creditors, such as hospitals, do not. A charge-off within your credit record signifies that you ignored your financial obligations for a long period of time.

A charge-off not only adversely impacts your credit score but, by appearing on your credit report, serves as a red flag for future creditors when you apply for new credit or loans. The payments you missed prior to the charge-off will also appear on your credit report and further diminish your credit rating.

Collection Account

Charging off a debt does not mean that the debt itself ceases to exist. Creditors often sell charged-off accounts to collection agencies. This benefits the creditor by allowing it to recover at least a marginal amount of the unpaid balance through the sale. After buying your charged-off debt, a collection agency will insert a derogatory note on your credit report showing its ownership of the account. Collection agencies report charged-off debts they purchase to the credit bureaus regardless of whether the original creditor did so.

Civil Judgment

Not all creditors sell their charged-off accounts to collection agencies. If your creditor retains ownership of your debt it has the right to file a lawsuit against you. Likewise, any collection agency that purchases the charge-off can also file a lawsuit. If the creditor filing the lawsuit wins a victory in court, the court grants it a civil judgment.

Creditors who seek a civil judgment do so in an effort to expand their collection options. After the court awards the judgment, however, a record of the lawsuit and judgment appears within your credit report. Like charge-offs and collection accounts, judgments are derogatory and negatively impact your credit.

Time Frame

Different aspects of the charge-off remain for varying periods of time within your credit history. The charge-off itself and any missed payments associated with it remain for seven years. Collection accounts also appear on your credit report for seven years. According to the Fair Credit Reporting Act, however, a civil judgment can remain a part of your credit record for 10 years or longer -- depending on how long your state permits creditors to enforce their civil judgments.