Financial hardships such as unexpected expenses or the loss of a job can lead to missed payments on your credit card. After a period of time, your creditor will close the credit card account, leading to a charge-off on your credit report. Charge-offs have a negative impact on your credit report and score, but you can take steps to improve your credit.
What Are Charge-Offs?
Charge-offs occur when you fail to pay your credit card. If a credit card debt goes unpaid for a period of time, typically 120 to 180 days, the creditor will close the account and report it as a charge-off to the credit bureaus, according to Bankrate. You will still owe the debt despite the creditor closing the account, and the creditor will likely sell the account to a collection agency that will begin contacting you for payment.
Effect on Your Credit Score
A charge-off can have a snowball effect on your credit score. When you fail to make a payment on time, the creditor will report a late payment to the credit bureaus, lowering your score. When the creditor declares the account as a charge-off, it will lower your credit score even further. If the creditor sells the account to a collection agency, the agency will report the account on your credit report, giving you another negative hit to your credit report and score.
Disputing Inaccurate Charge-Offs
Occasionally, either the credit bureau or the financial institution will report inaccurate information on your credit report. For example, the creditor may report that you owe more than you do or the credit bureau may list a charge-off account on your report that does not belong to you. Under the Fair Credit Reporting Act, you have the right to order a copy of your credit report and dispute any inaccurate information with the credit bureaus. The bureau will have to correct or remove inaccurate information, which may increase your credit score.
Minimizing the Damage
You can lessen the negative effective of a charge-off on your credit report by entering into a repayment agreement with the creditor. The creditor may be willing to report the charge-off account as "paid as agreed" or "settled" if you pay the debt, which will slightly improve your credit rating, according to Bankrate. However, you will need to pay the full debt or an agreed-upon settlement amount before the creditor updates your credit report.
Improving Your Credit
You can improve your credit going forward by paying your bills on time and paying down your total debt. While you are working on improving your credit, be careful of applying for too many new credit cards or loans as multiple inquires can lower your score. However, you may want to open one new credit card to build a history of timely payments if you do not have any open credit accounts.
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