Whether you realize it or not, your credit score plays a major role in your financial stability. A good credit score ensures that you can obtain the loans and credit cards you need at reasonable interest rates. Employers, landlords and insurance companies also evaluate your credit scores when you apply for a job, housing or new insurance coverage. Derogatory information on your credit report, such as evidence of a past charge-off, lowers your credit score -- damaging your ability to qualify for goods and services in the future.
Charge-Off
A charge off occurs when a lender stops trying to collect an unpaid debt and instead writes off the account as a tax loss. Though frequently used to refer to credit card debts, any lender can charge off a delinquent debt.
After a lender charges off your debt, it updates your credit report to reflect this fact. Charge-offs are negative notations and reduce your credit score. Each debtor's credit score suffers to a different degree after a charge-off since other information within the report also influences credit scores. In general, however, you can expect to lose approximately 100 points after a creditor charges off your debt.
Paying a Debt
Paying your delinquent debt prevents your creditor from charging it off and thus protects you from the credit damage associated with having a charge-off on your credit report. If you pay your debt in full and on time, your credit score increases rather than decreases since timely payments indicate that you pose a low risk for future lenders.
If you pay your debt late, however, your credit score will drop -- even if you ultimately pay the debt in full. Each payment you miss chips away at your good credit. MSN Money notes that a missed payment can drop your credit score by as little as 60 points to as much as 110 points. Thus, a series of missed payments can do considerable damage to your credit rating.
Settling a Charge-Off
You have the option to pay the debt after a charge-off takes place, but doing so does not benefit your credit score in any way. The original derogatory notation remains on your credit report for the full time period permissible under law -- 7.5 years.
Depending on your situation, paying the debt could potentially hurt your credit even more. Information on your credit report impacts your scores less as it ages. Should you settle an old charge-off, the trade line containing the negative entry updates to a more recent item and your credit score suffers as a result.
Considerations
While paying off a charge-off after it occurs does little to aid your credit scores, doing so prevents the creditor or any collection agencies that purchase the account in the future from filing a lawsuit against you. A creditor that wins a lawsuit can garnish your wages and seize your personal property. In addition, the court judgment in the creditor's favor appears on your credit report -- further damaging your credit.
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