No one wants to get behind on their debts, such as an auto loan, student loan, personal loan, credit cards any other type of loans, but sometimes it happens and we are unable to keep up with our monthly payments. At first, companies politely call and try to convince you to make a payment right then. However, after a couple of payments have been missed, the phone calls are not quite as pleasant and the representatives will try to pressure you into paying by threatening to charge off your account, resulting in bad credit or poor credit. But do you know what a charge off is? This post will help to give you a better understanding of what a charge-off is, tips on dealing with them, and how impacts your credit.
What Is A Charge-Off?
A charge-off is a term used in accounting. It is a notation made by the creditor when they believe that they will not be able to collect on a due debt that has gone into delinquency. After 180 days with no payments on revolving credit accounts, federal regulations require creditors to charge off the debt, recoup some of the money lost on the debt by selling it and can also use the charge off for certain tax exemptions. Now that you know what a charge off is, let’s talk about dealing with creditors.
Dealing With Creditors Before and After a Charge Off
Creditors have their own collection departments that call you at some point when you get behind on your payments, sometimes offering to help you out by making payment arrangements. During this period of past due payments, you are still dealing with the creditors and they are still being nice, hoping that you will pay your debt you owe them. Published federal laws and statute that govern how debt collectors operate does not apply to a company’s collection department. However, some states do have collection laws that the original creditors do have to abide by.
Once several months have passed and the 180-day mark, six months, is reached, the delinquent account is charged off and debt collection attempts begin from another company. The creditor now has to make a choice, either take a loss or try to get back some of the money. This is pretty much a no brainer and this is where your account gets sold to a debt collection agency. The creditor limits their losses by selling your account, for pennies on the dollar, to the collection agency. The collection agency will try to make a huge return on their investment by collecting the original debt amount from you and will start attempting to contact you.
You Are Still Obligated
You may think that since your debt has been charged off, it means that you are no longer required to pay it, wrong. Until the debt is settled, paid or discharged through a bankruptcy, you are still obligated to pay it. Additionally, even if the debt collection agency bought your account for very little, the average is between $0.03 to $0.25 for every debt $1, you are still obligated to pay the original debt amount. Depending on the amount of the original debt, the debt buyer might be willing to settle for a lower amount than that of the original debt. That doesn’t really have anything to do with the amount you owe, only the debt collectors’ willingness to resolve the account.
Just as with any other debt that has not be paid on in accordance with the original repayment terms, a charge off has negative effects on your credit. Charged off accounts indicate that you failed to pay the debt and that the balance is still outstanding.
The Disadvantage to Paying Old Charge-Offs
Paying off old debts that have been charged off might sound like the right thing to do when you are trying to improve or repair your credit. However, paying on those debts can actually hurt your credit score. Having a lot of activity on your older charge-offs is not uncommon. That is because the debt is creeping up on being time-barred, meaning the time limit has been reached to where the debt collectors will not be able to sue for payment of the debt. Another reason your old charge off could be receiving activity is because it could be close to its reporting limit. The reporting limit is when the charge off will no longer shows up on your credit report.
Once the charge off falls off your credit report, debt collectors will lose their leverage on pressuring you to pay any part of the debt. By paying on the old account, or even making an agreement to make a payment will set the clock back on the reporting limit.
Paying or promising to pay in either one of these situations places your credit in a bad spot. What you have just done by doing so opens you up to potential lawsuits and potentially having that old charge off relisted on your credit report as being brand new, further hurting your credit score.
Removing Charge-Offs From Your Credit Report
Yes, charge-offs sound intimidating, make it appear as though you have several delinquent accounts, are detrimental to your financial health, and can be a hassle to deal with. However, it is possible to have them removed completely from your credit report. It is important to know that any error on your credit report can be removed. If a debt collector has made any errors with the entry, including something as minor as stating the wrong amount owed, you can request to have it removed. Just ensure when you are making your request to the credit bureaus that you state your request with details on why the entry should be removed in a professional manner.
You can go about this process yourself; just know that it can be a hassle dealing with written correspondence and email, tracking phone conversations and credit reports all by yourself. However, it is possible. To learn more on how to tackle your credit report on your own, click here to view our website for free useful letter templates.
If this is something you feel you cannot do alone, relax, there is another option. There are a few leading companies that specialize in helping to repair credit reports and scores and are always ready to help with their expert services. For a list of a few of the best credit repair companies, click here.
Charge-offs can, and usually are the main cause for drops in most people’s credit score and stay on your credit report for years and are a leading factor in being turned down for many types of loans, including getting a mortgage. Many times, they get passed from one company to the next, causing several adverse entries on your report. None of us ever want to have to deal with them, but sometimes we have to. I hope the information listed above gives you a better idea of what a charge off is, how it affects your credit and how you can deal with them when and if you ever have to face them. Once you have the situation under control and understand the impact it caused, remember your past mistakes and how much it hurt your credit score before you go on a shopping spree and charge your card up again with frivolous purchases. If it is something that you don’t need, skip it, and leave the credit card at home. Disciplined finance management will help to keep your stress level down and your credit score up.