What is a charge off?
A charge off is a term frequently used by credit card companies to describe a bad debt that is reported as a loss on state and federal tax filings. It refers to an accounting practice where a creditor reclassifies the debt as a business expense instead of an asset. Typically, this happens after 6 months or more on non payment on an account. Even though the debt is written off as a loss, you are still legally obligated to pay it, and it is at this point that most credit card companies will send the debt to collections .
The debt collection letter I received said this will have ruinous effects on my credit for years to come. Is this true?
Although they are best to be avoided if possible, having charge offs on your credit report is not financial suicide despite what you may have heard. Typically, consumers start researching charge offs after they have received a letter or some other communication from a collector warning them that the mark will ruin their credit rating for at least 7 years. Although it may stay on your credit for up to 7 years, it does not necessarily mean your credit score will be feeling the effects for that long, especially if the debt was settled or satisfied.
If I have a charged off account on my credit, is it better for my credit score to pay it off?
In most cases, yes. That being said, if the account is very old and on the verge of no longer being reported to the credit bureaus anyway, then you are better off letting it fall off your credit profile. This happens after 7 years of non-payment on an account.
The debt collector told me that my delinquent account can stay on my credit report for seven years after charge off, not after non-payment . I am trying to qualify for a mortgage as soon as possible, but this is preventing me from getting the loan. Is this true? I checked my records and the account was charged off 6 years ago and I fell behind 7 years ago. What do you suggest I do?
No, this is not true and it is a common lie told by debt buyers to consumers in exactly this situation. They hope that you are so desperate to get the account off your credit history that you will settle it event though it is not necessary. The first step is to dispute the debt with the credit bureaus. You can do this by mailing a letter return receipt to Experian, Equifax, and Transunion. Once you have done this, mail a debt validation letter to the creditor return receipt requested. Thankfully the junk debt buyers are under such fire from Attorney Generals that this should scare them enough into taking it off your credit, but if not, contact a company for help. (Fill out a form today and PayingPaul.Com can put you in touch with a leading provider of debt help for a free consultation!)
What should I do about it?
Instead of dwelling on the credit rating impact of a charge off, consumers are much better served researching ways to pay off the debt without filing personal bankruptcy . There are several options available for consumers who have a bad debt that is being reported to the credit bureaus:
Eligibility For Debt Consolidation Loans
Generally, "Robbing Peter to Pay Paul" is not an advisable tactic, but this is even more the case if "Paying Paul" involves paying a charged off account. With this type of black mark on your credit report, it is unlikely you would qualify for a loan to begin with, let alone a loan with reasonable interest rates.
Instead, please feel free to use PayingPaul.Com's free service to get matched directly with some of the nation's leading providers of credit card debt management online. Simply fill out a form for a free consultation from an expert to get started saving money today!
Settling Charge Offs
Debt settlement is also known as debt negotiation, and it involves negotiating with credit card companies to lower the amount that a consumer owes on any bad unsecured debts. Depending on what you can afford, this type of program is usually 12-36 months long and clients can reduce their credit card charge offs by 40-60%. This is generally the preferred method for consumers with bad or old debt since it can potentially help them save the most money without filing bankruptcy. Ultimately, the account will be reported as "settled for less than the balance" on your credit report, but a satisfied charge off is much better than one that goes unpaid.
Credit Card Counseling
Accounts that have already been charged off may not be eligible for credit counseling, but if they do, a debt management plan (DMP) can help you to get out of debt in 4-5 years by reducing your interest rates. Since most credit card companies don't charge interest once an account is charged off, it is unlikely that this will be of much help for you other than the fact that it can consolidate all of your debts into one low monthly payment.