Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand.
Basics About Charge-Offs and Why You Want to Avoid Them
By Britt Erica Tunick
When it comes to your finances, one of the most important things you can do is maintain a good credit rating which determines everything from whether or not you can actually get credit or a loan, to the interest rate you will be charged to do so. Beyond bankruptcy, one of the biggest red flags for potential lenders is a charge-off on your credit report.
A charge-off is essentially a creditor’s way of stating that they have exhausted efforts to get you to pay a debt that you owe and are writing off your account by taking the loss, or turning it over to a collection agency for collection. This is typically done anywhere from 120 days to six months after a debt was initially due and no payment has been made. Under the Fair Credit Reporting Act, a creditor needs to indicate the date that your account became delinquent information that will show up on your credit report. But just because an account has been charged off, don’t assume that will be the end of it.
Unlike mortgages, where banks can foreclose on a home to recover their investment, or a car or other high-ticket item where repossession is likely, a charge-off means a creditor is going to take a loss on their books for bad debt. As you might expect, creditors are not happy when they have to do this, so if you have a debt that is ultimately charged off, the odds are pretty good that you can expect a call from a collection agency. And, as with anything negative that makes its way to your credit report, expect a charge-off to stick around for seven years. In some cases, a creditor may even file suit against you even after a charge-off is reported on your credit report although there are strict rules regarding when this can be done which vary from state to state.
If, however, there is an error on your credit report regarding a charge-off, you have the right to dispute that just make sure you have documentation to prove that you did, in fact, pay the debt in question. If your debt is ultimately paid off through a collection agency, creditors must now inform all three credit rating agencies when the debt was paid.
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